Lessons from 2021, Pt. 1

One of the best-known market adages encourages traders and investors to “buy the rumor and sell the news”—a reminder of the anticipatory nature of markets, which are always attempting to process information before it makes headlines.

One example from this year suggests that, at least in terms of potentially bearish developments, the saying could be tweaked to, “Buy the fear and sell the relief.”

That certainly appeared to be the case this fall for Deere (DE), when anticipation of a labor strike appeared to weigh more on the stock than the walkout itself. In fact, the stock bottomed the day the strike started (October 14), hitting its lowest price since February before closing up on the day:

But even though the strike made headlines when it began, it was hardly a bolt out of the blue—it had been the subject of speculation at least since September 30 when the old labor agreement lapsed, and likely much earlier, since the parties involved had long known the deadline was approaching. Deere fell throughout most of September (along with the rest of the market), and the stock took a sharp dive when labor rejected an initial contract offer on October 11, three days before the strike.¹

Then, in what may have confused the casual observer, DE shares rallied nearly 10% during the strike, outperforming the S&P 500 (SPX) by more than two percentage points. While that may have looked like the market was saying it thought a walkout was good for business, it more likely reflected the reality that investors had already been pricing in the possibility of a strike: From September 3 to the day before the strike, DE fell 15.5%, while the SPX fell just 3.8%. The official beginning of the walkout removed an element of uncertainty, since no matter how long a strike lasts, the sooner it begins, the sooner it will end.

It was perhaps no great shock, then, that when headlines announced on November 17 that labor had agreed to a new contract, DE closed down 2.4%, and spent the next two weeks drifting mostly lower.

Honorable mention: Crude oil futures posted their biggest percentage up day in two weeks (+2.6%) on November 23—the very day the US announced it would (along with India, China, Japan, South Korea, and the United Kingdom) release crude oil from its strategic reserves to attempt to lower oil prices.²

The thing is, at that point oil had already retreated as much as 10% from its late-October (and seven-year) highs near $85/barrel—amid plenty of chatter that the US was considering this option. Traders may also have been less than convinced that tapping the strategic reserve would meaningfully impact the supply picture. (And, yes, the market sold off sharply just two days later, but that move coincided with the Omicron news.)

The lesson: Don’t discount the market’s ability to discount. Investors and traders are constantly looking forward, gauging the probabilities of different outcomes, and buying and selling based on their forecasts. Sometimes, if you wait for headlines to make things official, you’ll find the market has already priced in that news and moved on to the next item of interest.

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¹ CNN.com. Autoworkers at John Deere will remain on strike after voting down another tentative deal. 11/3/21.
² CNBC.com. U.S. to release oil from reserves in coordination with other countries to lower gas prices. 11/23/21.