Lexicon Financial Group Weekly Update — March 19, 2025
“The market may be crazy, but that doesn’t make you a psychiatrist.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Wayne and I studied economics at university, albeit on different continents. Economics, as you may know, is a branch of social science that focuses on the production, consumption and transfer of wealth. It is broken into macroeconomics and microeconomics. Macroeconomics focuses on large-scale factors - interest rates, national and international productivity, etc. Microeconomics, on the other hand, focuses on the behaviour of individuals (like you and us), businesses and organisations, when it comes to using their wealth. Economics directly affects everyday life through important areas such as tax, interest rates, wealth, and inflation. (1)
In the field of economics, there is a concept called “homo economicus” (or the “economic man”), which is essentially a theoretical individual who always makes the correct decision based on their own self-interest. This concept leads to “rational choice theory,” which attempts to explain why and how this person (and consequently, larger groups of people) use rational calculations to make choices and achieve outcomes that are aligned with their own personal objectives and self-interest. Now, this may sound like a bit of a crazy premise because no individual always makes the right decision every time. And, almost certainly, no one has access to all information at any given time. But “homo economicus” can help us understand investor behaviour.
In reality, the price of any stock that trades on the stock market is determined by the laws of supply and demand. If more people believe in the value of a company, they will bid higher and higher prices to acquire shares in that company. If they no longer have confidence in a company, they will try to sell those shares on the open market to the highest bidder. There are millions of individual and institutional investors buying and selling shares at any given moment, so the price of a share reflects market sentiment. Let’s call this “the wisdom of the crowds,” which is another way of saying that the collective opinion of a diverse and independent group of individuals is a good indicator of the actual value of a company.
The prices of stocks are almost always forward looking. “Homo economicus” buys shares because of a belief that the shares will deliver value in the future. The past doesn’t matter as it is the past. Indeed, past performance is not a good guide for future performance. What matters, in the now, is how the investors feel the company will do into the future.
So, what explains the extreme volatility of certain economic sectors, companies, or asset classes? Some of it is due to market response to real-world events. Is it due to people making decisions without sufficient information? Perhaps. But we’re human, so emotions play a role as well.
Take, for example, shares of car maker, Tesla Motors (TSLA). How much of the sizeable rise in the price of shares of Tesla Motors (TSLA) was due to the influence of its charismatic CEO? How much of the recent decline in the value of these shares is as a result of the actions of its charismatic CEO? How much of the rise was due to the fear of missing out? And how much of the decline was due to the aversion of loss?
In 2002, Daniel Kahneman won the Nobel Prize in economics for his study that showed that when we make financial decisions, they are based 90 per cent in emotion and only 10 per cent in logic or reason. This research transformed decades of economic theory that stated that humans are rational and will act in their own best interest. Kahneman’s new research, however, didn’t defy the prevailing theory, but rather shifted its focus. We still act rationally based on our perception of reality, but our emotions often warp our perception of reality. Therefore, ‘best interest’ changes from objective and calculable to subjective and emotional. Consequently, it stands to reason that even when we know what we should do, we often don’t do it. It’s because, to us, it’s not in our ‘best interest’ or it will not help us feel happy. (2)
Removing emotion from the investment process completely isn’t possible. What is possible, however, is to impose a discipline required to objectively review all available information and make an informed decision. This disciplined process should also remove some of the other well-known “behaviour” biases that influence decision-making.
For long-term investors, the question should be whether their portfolio is positioned to provide value in accordance with their time horizon, not how it fluctuates on a day-to-day basis. Short-term investors probably should not be over-exposed to risky assets like stocks, because we know that when emotions drive decision-making at any level, behaviour can be unpredictable.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
The Federal Reserve sees tariffs raising inflation this year and keeps key rate unchanged
FIRST READING: New figures on just how badly Canada and U.S. are being mauled by Trump trade war
Video: Can Europe's economy survive in a new world order?
Why is China spending billions to get people to open their wallets?
Looking Back
So far, this week, stock markets have reclaimed some of the losses of last week. The big news this week was the decision of the United States Federal Reserve (Fed) to leave interest rates unchanged, as Fed officials stuck to their previous forecast for two more cuts this year, despite bracing for higher inflation and slower growth. The Fed may change its stance but, for now, the cost of borrowing is not going to decrease for U.S. consumers and businesses.
The Toronto Stock Exchange's S&P/TSX composite index (TSX) rallied last Friday, as technology and financial shares led broad-based gains and Mark Carney was sworn in as prime minister of Canada. Despite this, investors are not convinced that the recent tariff-driven selloff has run its course. The TSX has fallen 0.71 per cent since the beginning of the year and ended last week down 0.8 per cent. (3)
Last week, major stock markets in the U.S. posted losses for the week. The S&P 500 Index and Nasdaq Composite marked a fourth consecutive week of negative returns. The Dow Jones Industrial Average slid 3.07 per cent last week. Ongoing uncertainty surrounding trade policy appeared to be the main driver of the negative investor sentiment, as new tariff announcements from the Trump administration continued throughout the week. Concerns about economic growth and increasing recession fears were not helped by comments from President Donald Trump regarding a “period of transition” for the U.S. economy.
Source: Bloomberg, S&P 500 Index.
Last week, the Labor Department released its consumer price index (CPI), which indicated that consumer prices rose 0.2 per cent month over month in February, while core CPI (less food and energy) saw its lowest year-over-year increase since April 2021. February’s readings for both monthly and annual inflation slowed from January, and both were slightly below consensus expectations. This appeared to help alleviate some concerns about the U.S. economy entering a period of stagflation. Stagflation is an economic scenario in which growth is stagnant, inflation is high, and unemployment rises. However, data from the report predate a large portion of the Trump administration’s recent tariff actions and investors wasted no time in refocusing on the uncertainty surrounding the impact that these actions will have on prices over the next several months. Inflation expectations for this year increased to 4.9 per cent from 4.3 per cent in February - the highest since November 2022 and the third consecutive monthly increase of 0.5 percentage points or more.
Major stock markets in Europe ended last week either lower or flat, amid worries about how U.S. trade tariffs would affect economic growth and uncertainty over monetary policy. The European Central Bank (ECB) policymakers expressed doubt last week about another interest rate cut in April. The exceptionally high uncertainty currently could make it harder for the ECB to meet its two per cent inflation target in the short term. Worth noting here is that Germany’s coalition government-in-waiting and the Greens agreed to a deal for a huge increase in state borrowing. Friedrich Merz, the next chancellor, wants the outgoing parliament to approve a EUR 500 billion infrastructure fund and a loosening of the so-called debt brake to increase spending on defense.
In Japan, stock markets rose modestly last week. But uncertainties about global trade dented sentiment and capped gains. The major concern for Japan is the Trump administration’s proposed duties of around 25 per cent on imported cars. Cars make up roughly one-third of Japan’s total exports to the U.S. Investors also focused on the takeaways from Japan’s spring “shunto” labour-management wage negotiations, which secured the largest pay deal in more than three decades and indicated a steady wage growth trend. These wage negotiations have now delivered significant wage increases for three straight years. Wage growth momentum could influence the timing of the Bank of Japan’s next interest rate hike, as it watches for a virtuous cycle of wages rising in tandem with prices, driving economic progress. Market consensus is that the central bank will raise rates again later this year.
Mainland Chinese stock markets rose on stimulus hopes, after Beijing said it would hold a press conference on Monday with policymakers focusing on boosting consumption. Increasing consumption to drive economic growth has become more important for China’s policymakers since the onset of the U.S.-sparked trade war. At the just-concluded National People’s Congress meeting, China set an ambitious economic growth target of about five per cent for the third straight year and stated that boosting consumption is the government’s top priority for 2025. Stamping out deflation is a matter of growing urgency for China, but a yearlong housing slump has prompted its citizens to save rather than spend. (4)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Why do we study economics?, Royal Holloway, University of London International Study Centre, February 28, 2025
The Psychology of Money 101: Emotional Relationship With Money, David Lowell, Savology
TSX scores biggest gain since August in relief rally, Fergal Smith, Reuters, March 14, 2025
Global markets weekly update – U.S. inflation eases in February, T. Rowe Price, March 14, 2025
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
A Wealth of Well-Being: A Holistic Approach to Behavioral Finance
Homo Economicus: Meaning, Overview, and Criticisms
Rational Choice Theory: What It Is in Economics, With Examples