A quick scan of any media source will result in any number of bits of bad news. A wildfire here, an earthquake there – wars, rumors of wars, plagues and pestilences of all shapes and sizes fill our daily sphere of consciousness.
Some of this bad news appears to affect the capital markets. An earnings report below expectations can weigh heavily on an individual stock. A disappointing employment number or GDP figure can put pressure on the overall market. Fears of Western military intervention in Syria took down the S&P 500 by 1.5% in one day earlier this week.
In spite of the bad news we see often, the stock market stands just below its all-time high. Ultimately, stock prices are not determined by the balance of good news versus bad. Fundamental factors such as corporate earnings (both level and growth rate), interest rates (level and trajectory), funds flows, cash levels and sentiment are, in my view, much more important to the markets than the daily news flow. I would submit that stock prices are where they are because fundamentals are quite positive. I would also suggest that they are supported to an important extent by the ton of bad news out there.
Let me explain. There has been only one period in my career where bad news was hard to find – the late 1990s. Business was booming, the dot.com era represented a “paradigm shift” and the stock market was a one-way bet. I knew people who would use cash advances from credit cards to day trade. I once saw a colleague, who had never invested in the stock market before, plunk down $100,000 on one stock (he made tons money on this stock, but that is beside the point…). Those were heady times. The dearth of bad news created a euphoric aura around the stock market – everyone “knew” that stocks were a “sure bet,” a “riskless investment” and “the only game in town.” This kind of universally positive sentiment always accompanies the peak of the market. The bear market following the tech bubble was not pretty, and was caused in part by the lack of bad news.
I sometimes hear from a client or a colleague something like, “If we could only get some better news on ____ (fill in the blank), I think stock prices could move higher.” This statement supposes that the lack of good news is the only thing keeping stocks from moving higher. I might argue that when all bad news is gone, that is the time to get cautious. As long as we have much to fear, things are probably going to be alright.
In closing, let me share some data I got from Liz Ann Saunders, the equity strategist at Charles Schwab. From March 31, 1960 to December 31, 2012, when the year-over-year change for GDP was less than 0.5%, the annual returns on stocks was 10.5%. When year-over-year GDP was between 0.5% and 6.0%, the annual return was 7.2%. When GDP grew more than 6% (this has to be good news right?), the annual return on stocks averaged -4.6%.
So, whenever you catch yourself bemoaning all the bad news out there, stop and think about how it might actually be helping your portfolio in the long run.