Saturday , 24 June 2017


What’s the Best Way to Invest Given Today’s Disturbing World News Headlines?

It’s hard not to see some disconnect between recent disturbing world news headlines and the market’s quiet investing-hold-buy-selladvance but this disconnect is rational in the short term, but not necessarily in the long term. Here are 3 rules of thumb for how investors can potentially respond.
The above comments are edited excerpts from an article* by Russ Koesterich, Chief Investment Strategist, Blackrock Investments (blackrockblog.com) entitled Disturbing Headlines, Strong Equity Markets: Why the Disconnect?.

Koesterich goes on to say in further edited excerpts:

In recent weeks, the equity market has continued its quiet advance. Both global and U.S. indices have hit record highs amid low trading volume. On the surface, this seems unremarkable given the market’s slow but steady ascent and the still benign environment of low rates, quiescent inflation and easy monetary policy that is supportive of stocks.

However, if you overlay the market’s recent performance against world news headlines on the front page, rather than the business section, it’s hard not to see some disconnect. In recent months, news headlines have covered:

  • the growing disintegration of Ukraine,
  • the victories of anti-euro and neo-fascist parties in European elections,
  • a military coup in Thailand and
  • the U.S. Justice Department indictment of five members of the Chinese military for stealing trade secrets.

yet none of these events have:

  • prevented stocks from reaching new highs,
  • equity market volatility from sinking to multi-year lows or
  • deterred investors from gobbling up the most speculative forms of high yield.

Is this simply a case of cognitive dissonance or are investors behaving rationally? My take: the disconnect may be rational in the near term, but not necessarily over the long term.

The Short Term

In the short term, recent market action isn’t as irrational as it might appear.

  1. There’s no clear link between these events and near-term economic or earnings growth. Yes, an escalation of violence in Ukraine could lead to increased sanctions against Russia and potentially slower growth in Europe, but thus far none of the parties involved in the crisis seem inclined to up the ante.
  2. Over the past five-years investors have been conditioned to “buy the dips.” Anyone who bought equities during the U.S. debt ceiling debacle or the showdown over European sovereign debt has been well rewarded.
  3. While these issues are obviously significant from a geopolitical perspective, some have little systemic significance for the global economy. The events in the Ukraine and Thailand are national in nature, and together these countries account for less than 3% of the MSCI Emerging Market Index.

The Long Term

However, while investors may be right to give a low weight to short-term impact of the front-page headlines, the headlines’ long-term impact may be a different story.

  1. Wars, military coups, and sanctions are rarely good for global economic growth.
  2. The pressure to increase military spending – a reality faced by the United States as well as Europe and Japan – has already strained government budgets.
  3. If there was a “peace dividend” at the end of the cold war, western governments may face a “geopolitical tax” in the coming decades.
  4. Finally, the growing populism – evident in the outcome of recent European elections – raises the risk of misguided policies that could add drag to an already sluggish recovery.

To be sure, none of these potential long-term effects are likely to hurt markets in the near term, but ironically investors are becoming more acclimated to the risks at a time when their cumulative impact may be starting to impact global growth, risk premiums or both.

For investors wondering how to respond to the potential long-term impact of world news headlines…I would suggest 3 rules of thumb:

  1. diversify,
  2. have some small portion of your portfolio allocated to “cheap insurance” assets that should do well in a crisis, and
  3. emphasize value. It’s not that cheaper assets will be immune when, and if, this year’s headlines lead to next year’s crisis. Rather, it’s probably easier to avoid a meltdown in your portfolio if you own assets that reflect the world’s imperfections.
 
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.blackrockblog.com/2014/06/10/disturbing-headlines-strong-equity-markets-disconnect/ (© 2014 BlackRock, Inc. All Rights reserved.)

Related Articles:

1. U.S. Economy Headed Toward Deep Recession – Here’s How to Take Advantage

I believe that the economy is headed toward a deep recession and that the stock market is extraordinarily overvalued based on unrealistically high expectations for economic output and corporate income… Read More »

2. EXPECT & PLAN For A Major Stock Market Correction In the Coming Weeks/Months – Here’s Why & How

The S&P 500 is now up over 180% since troughing in March 2009 and it has been almost 3 years since the stock market experienced a 10% correction. Historically, market corrections happen approximately every 2 years on average. [As such,] we think that this rally is getting very long in the tooth and we wouldn’t be surprised if we have a healthy pullback in the coming weeks or months. Read More »

3. Bigger IS Better! What Does This Selective Advance Mean For the Stock Markets Going Forward?

The average U.S. stock is DOWN over 1% thus far in 2014. How can that be when we’re being told almost daily that the Dow and S&P 500 are hitting new all-time highs? The answer is likely to surprise you. Read More »

4. Believe It or Not: Both Bulls & Bears Playing In Current Market

The current U.S. equity market has something for everyone. Whether you are bullish or bearish, there is no shortage of indicators or charts you can use to support your thesis. Read More »

5. Remember the “Nifty 50″? It’s Back! What Does It Mean For the Markets Going Forward?

Market historians will recall the term “Nifty 50” originated in the 1960’s bull market to describe 50 wildly popular large-cap stocks at the time. Interestingly, some of the same names from that list are leading the market higher today. The question for investors, of course, is what this selective advance means for the markets going forward. Read More »

6. Betting Against the Prevailing Consensus Builds Wealth – Here’s Today’s Prevailing Consensus

If you want to make money long-term, you have to bet against the prevailing consensus of most financial experts. I have never seen such an overwhelming bullish consensus as there is today that the economy is going to do great, that gold is a sell, and that the stock market is going to go higher, and if you want to build speculative wealth, you have to bet against that. Read More »

7. Are We In Phase 3 – the Final Phase – of This Bull Market Yet?

Are we in the third phase of a bull market? Most who will read this article will immediately say “no” but isn’t that what was always believed during the “mania” phase of every previous bull market cycle? With the current bull market now stretching into its sixth year; it seems appropriate to review the three very distinct phases of historical bull market cycles. Read More »

8. Watch These 12 Data Points For Future Direction of Gold & Stocks

A big short term move in both stocks and gold is probably fairly imminent as periods of extremely low volatility like we are currently experiencing are invariably followed by periods of very high volatility that are brought about by a trigger event of some sort. There will probably be an advance warning somewhere, in a corner of the markets that perhaps isn’t widely watched…[so] keep a close eye on these 12 inter-market signals. Read More »

9. Ride the Market Waves With These 6 Momentum Indicators

It is hard to know what to buy or sell let alone just when to prudently do so. Thank goodness there are indicators available that provide information of stock and index movement of a more immediate nature to help you make such important decisions. This article describes the 6 most popular Momentum Indicators. If ever there was a “cut and save” investment advisory this is it! Words: 1234 Read More »

10. What Could Possibly Be A Better Safe Haven Than Gold? Read On

Some market commentators are touting gold as a great portfolio diversifier, convincing investors that the precious metal could benefit their portfolio but there may be better alternatives than gold if the motivation is to find a hedge for economic uncertainty or political unrest. Read More »