If you’ve read any of our posts over the past several months, or perused the linked articles, you’ll know we often return in some form or fashion to the over-wrought media market coverage you’ll find out there in both the mainstream press and on widely followed blogs. A few months ago, for instance, everyone was gaga over the Cyprus bailout and how Cyprus’ troubles meant the end of western civilization as we know it. In recent days, every time we open the paper or scan through the news screens, we’re confronted with headlines about amazing market volatility, and wreckage, and amazing market moves over recent sessions. Most of the articles attribute all moves, up, down, or sideways, to Bernanke’s “tapering” talk, or some variation.
Don’t get us wrong, there have been some interesting moves in markets over recent weeks. Since the beginning of May, the US 10-year treasury yield has risen a whopping 50 bps—from 1.65% to 2.14%, still among the lowest yield prints in history and back to basically the same spot observed last May. The Nikkei, Lord forbid, has fallen from an intraweek high approaching 16000 at the end of May to the current level of 12686. There’ve been enough headlines about a Japanese bear market this week to make one sick to his/her stomach. Never mind that the Nikkei is up approximately 50% in local currency terms since November, even after the recent correction! Is that truly a bear market? Maybe if you chased at the recent top. The Nikkei and Japanese yen both got caught up in parabolic frenzy, and market participants are rightfully deflating some of that balloon.
One particular Bloomberg Radio headline caught my attention in the car the other day, saying that recent market moves had eliminated $2.5 trillion in stock market value globally since May 21st. Pretty scary, no? A quick look at the various indices, however, shows a rather mild, perhaps healthy correction since the end of May. The MSCI World is down less than 5% peak to current trough, entirely unexceptional when it comes to market corrections historically. The S&P is off a more benign 3.7% from its intraday high set several weeks ago. After all, markets had risen relentlessly for months and were showing some classic short-term technical overbought signals.
Returning to the notion of volatility, one would think reading the headlines that volatility in equity markets had reached levels not seen since the scary days surrounding the European debt crisis in late 2011. Checking the 20-day volatility numbers for both the S&P 500 and MSCI EAFE indices this morning shows that volatility for both indices is exactly in line with the long-term historical average, and below the average for 20-day volatility observed over the past five years. Perhaps, we’ve all been spoiled by the relentlessly calm move higher in global and domestic equity markets.
The point here isn’t to call out the media or even make a call that markets are going to immediately begin a dramatic move higher. In reality, we wouldn’t be surprised if global equity markets had a little correction left in them. The S&P 500 is still about 125 points above its 200 day moving average and hasn’t touched that trend line since last fall. Markets back and fill and that’s ok. The broader point is to point out again how dangerous it can be for individual and institutional investors to get caught up in dramatic news flow to the detriment of their portfolio performance (and sanity). All of us, from those that casually follow business and market news to those like us that spend all day watching screens and doing this for a living, are bombarded by an ever-increasing array of news sources, analytical tools, and other ways to keep up. Much of it is noise, and oftentimes the headlines are overtly negative to grab one’s attention and lacking a sense of perspective or context, as seen above. We’ve pointed out in past notes on market sentiment that several sentiment indicators have been tracking in decently negative territory, despite the fact that markets have been grinding higher and higher. Hence, we’ve seen classic “climbing the wall of worry” behavior. With headlines and talk of volatility and tapering, the sentiment indicators we follow have fallen deeper into negative territory (potentially a positive contrarian signal). The CBOE put/call ratio is the highest it’s been since May of 2012, when the market was experiencing a deeper short-term correction (and there were proclamations about the end of Europe and the world as we know it). The Farrell Sentiment Indicator, based upon the AAII bull/bear numbers, is low by historical standards.
Again, it’s never time to be complacent when investing in equity markets. At the same time, we become much more concerned when investor sentiment is trafficking in extreme positive territory, not when some investors and pundits are acting like a 3% correction is the beginning of a 2008 repeat. As a final note, in the face of ever increasing noise, it’s good to point out again that having a plan or system to add objectivity to the investment process can make a significant difference when buffeted by loads of conflicting information. Furthermore, applying the “keep it simple stupid” principle when approaching markets is often more productive than creating overly complex systems and analytical tools.
