How the Boston Celtics Saved Their Season

Tom Levinson Comments

Late in the evening of January 6, 2022, Tom sent a text message to a friend. This friend lives in Boston, follows the NBA closely, and is a lifelong Celtics fan.

Earlier that evening, after trailing by as many as 25 points, the New York Knicks (a grim, unfortunate passion of Tom’s) had staged a stunning comeback, beating the Celtics on a desperation, last-minute shot.

Tom texted his friend to console and, it must be acknowledged, to taunt, as well.

Tom’s friend replied that the Celtics were “done.” They had blown a winnable game the night before, against the mediocre San Antonio Spurs, and these two losses had brought Tom’s friend to the point of surrendering the season.

As casual NBA observers know, the Celtics are now one of four teams remaining in the playoffs.

Following that dispiriting loss to the Knicks, the Celtics went 33-10 the rest of the season – including a 9-game winning streak and another stretch where they won 11 of 12 games. They are favorites to win the NBA championship this year.

What happened? How, exactly, were they able to turn it around?

Well, part of the explanation is that they had a new coach, and it can take time for a coach and players to mesh. The coach began experimenting with new players and varied lineups, and the Celtics built the best defense in the league.

At the same time, their two-star players bought into the team concept, sharing the ball unselfishly and getting other players involved in the offense.

The Celtics’ season is a helpful reminder that positive and negative developments can and often do take place at the same time.

Surveying the current financial and economic landscape, we can see this clearly. Some illustrations:

  • While market returns were strongly negative in April, April was, at the same time, another month of solid job growth. US employers added 425,000 jobs in April, matching the previous month, with broad-based growth across every major industry, and the unemployment rate remained at 3.6%, just a touch higher than its level right before the pandemic (NY Times, 5/7/22, page A1).
  • Strong economic growth is usually favorable, but not if it gives rise to undesirably high inflation.
  • Undesirably high inflation can cause the Federal Reserve to raise the short-term interest rates it controls, in larger amounts and at a faster pace than would be preferable to the financial markets.
  • The Fed needs to control inflation so that the purchasing power of the US dollar remains stable; otherwise, prices in the economy can rise too quickly.
  • Rising prices can of course be a boon to businesses. They receive the extra revenue, which can in turn help increase profits, and workers can receive extra money in terms of higher salaries and wages. But since this extra money also represents higher costs to these same businesses and workers, the overall impact can be harmful, taking all the data in aggregate. The impact on people with fixed incomes is even worse.
  • Since the pandemic started in March 2020, economic activity and stock and bond market prices have experienced a number of unusual periods. During the pandemic, the Fed kept interest rates at historic lows, which presumably helped reinvigorate economic activity and financial market prices. Of course, no one wants a pandemic to recreate those conditions. Now that interest rates are rising, and quickly, is economic activity going to slow down meaningfully and adversely impact financial market prices? This is the key issue as near-term events unfold.
  • The terrible war in Ukraine presents another example of the highly unexpected. Its ongoing impact on the economy and financial markets is also unclear.
  • It is to be expected that bond prices decline when interest rates rise substantially and quickly. Even so, the extent of the price declines, particularly on the longer end of maturities, is always an uncertainty, as it is never known when the actual and expected bad news has been priced into current prices (see Jeff Sommer, NY Times, 4/17/22, section BU, page 3).
  • One important relationship is that as interest rates rise, bonds become more attractive as an asset class, because (a) their prices have declined, (b) they historically decline much less than stocks in the same time period, and (c) the higher interest rates end up being paid to the bond investors as time passes. In this way, the benefit of higher interest rates will happen for bond investors over time, even as they experience price declines over the short term.
  • Finally: while rising interest rates have a clear and direct impact on bond prices, their effect on stock prices is much less clear and direct, given the many other factors that influence stock prices.

An important part of weathering periods of uncertainty lies in recognizing that even as certain trend lines look negative, there are countervailing trends happening simultaneously.

Another important part: remembering that your goals and your time horizon – not what’s happening over the short-term – are most essential for you.

Our narratives frequently can’t capture the world’s complexity. A period of recent negative performance doesn’t necessarily signal what’s to come.

Good luck to the Celtics – and whoever else your team is. As Cleveland Browns fans are accustomed to saying: “There’s always next year!”