- The S&P, Nasdaq, MSCI World, and Dow are approaching, or have reached, nice round numbers—milestones to some.
- Cognitive errors push investors to place emphasis on milestones. But index thresholds are meaningless to markets.
- As headlines attribute vague but vital significance to milestones, remember, markets ultimately reflect fundamentals.
The S&P is approaching 1,000! The Nasdaq is nearing 2,000! MSCI World breached 1,000! The (faulty but culturally important) Dow Jones Industrial Average just crossed 9,000—10,000 may be next! Or maybe it's too high? Either way, it's milestone mania!
Turns out, we do. Well, the irrational, cognitive error-prone parts of our brains do. In many investors' minds, these numbers are important, meaningful milestones. In ancient Rome, Emperor Augustus placed a pillar in the center of the Forum, marking the starting point for a system of roads. The roads were marked every mile, or the distance covered in 1,000 paces (mille is Latin for 1,000) by a stone. These milestones became important markers to travelers, helping them sense the distance between two points and determine how far they traveled in relation to Rome.
Ever since, milestones have become an important form of measurement—tracking progress, marking a destination or end stage, denoting significant events, and determining distance. In investing, however, milestones are simply misleading. What do markets know of milestones—of beginnings, distance, and endpoints? Nothing—numerical milestones are meaningless to markets and have no historical forecasting power whatsoever.
First, consider that markets have no ostensible end point, so a "milestone" in and of itself is meaningless—a faulty metaphor.
The mind constantly attempts to categorize and contextualize what it perceives, and it generally does so with simile, analogy, and metaphor. We don't do ambiguity well—but often our attempts to create context reveal more about our brains than about reality. To illustrate, consider that in the West we tend to think of markets as going "up" or "down." But in the East, most often the metaphor for markets is growing "larger" or "smaller." That is, we tend to understand markets in terms of direction, but other cultures see it as change in size.
Being unaware of this only does harm in the long run, because we create certain associations with those arbitrary milestones. For example, maybe you think if the S&P 500 passes the 1,000 level, that means markets will definitely end higher this year. Or if the Nasdaq can't get over 2,000, then it's going to stagnate, or worse, fall. Logically, we know markets don't adhere to those notions, but that doesn't stop us from thinking them—and sometimes acting on them.
If markets start creeping toward those higher, round numbers, don't be surprised if technical analysis enthusiasts appear out of the woodwork, attributing vital significance to those levels—claiming reaching or not reaching those markers will show how markets will do going forward. This is faulty reasoning—ignore.