February CalmMarch 2, 2015 12:00 am
The lifecycle of a headline is purported to be around three weeks. A while back I read this theoretical timeline explaining the news media’s short attention span on major events. For stories that last longer than three weeks, it was deemed to be harder to maintain a sufficient level of drama and urgency needed for publication. I would add that if the story or event is reoccurring, the first episode appears to be the most powerful one.
Extrapolating this to the markets: traders don’t appear to have much longer attention spans than the media, although investors can (and should) be more apt to show patience.
As an example of headline timing, take Ebola last fall. The markets responded with a quick 9% decline when the news broke that Americans were contracting the disease. But the markets revived just as quickly when the extent of the epidemic was more clearly understood. Even if Ebola pops up again on our shores, the markets are unlikely to respond with the same magnitude as they did the last time. In spite of the ongoing suffering caused by the epidemic overseas, to the markets it is an old story.
And as for reoccurring tales, Greece is a good example. Currently in the Eurozone another round of Grexit is playing out. Grexit is the fear that Greece will exit the Eurozone due to EU demands for lower Greek debt obligations and budgetary constraints. The Greek economy, much improved since the last Grexit crisis in 2012, is still facing serious economic challenges. However, the markets in Europe and the US have essentially ignored this story, which in 2011 and 2012 caused significant market gyrations. Even as the potential crisis this time around was kicked again down the road, European equities have rallied. Fears of a collapse of the Eurozone have been replaced with reports of stronger company earnings, January’s announcement of QE by the European Central Bank, and more positive economic data, led by Germany.
There are other stories that are recycling: Putin’s reach into the Ukraine and China’s response to its real estate bubble, but here too the urgency for these stories seems to have waned. Only ISIS is finding new ways to keep fear and disgust front and center in the headlines.
Due, in part, to this lack of new news, February turned out to be a relatively calm month in the markets. The volatility index [VIX VOLATILITY S&P 500 (^VIX)] retreated from $20.97 on 1/30 to $13.34 on 2/27. The S&P recovered from its 2% January loss to reach new highs, and the Nasdaq is within throwing distance of its all-time high of 5048.62 achieved fifteen years ago on March 10, 2000. The dollar took a breather – moving sideways – and oil reclaimed at least some of its lost pricing power. Not a bad month overall.
The return of calm to the markets last month, however, does not necessarily mean a reversion to the 2014 status quo of little volatility. The global economy is evolving and new winners and losers are emerging. Three weeks may make a headline story, but most often it does not make an economic trend.
Update on the US Equity Markets:
The US is still perceived to be a good bet due to its growth story, investor sentiment, credit availability and technical indicators. However, 2015 earnings forecasts for US corporations have gone from double digit growth last fall to near flat on a four quarter basis this year (Ned Davis Research). This is largely due to the collapse in oil prices, which has affected energy producers dramatically while offering lesser benefits to energy consumers. And with market highs supporting the view that valuations are stretched, sector selectivity could become increasingly important in the coming months ahead.
What sectors StrategicPoint likes: the tech sector, which is on a tear due to low energy exposure and an increase in capex; healthcare which continues to experience rising demand and offering innovative medical solutions; and consumer staples which are benefitting from declining commodity prices, a reviving labor market and potential increase in spending by the low-end consumer.
We are currently least attracted to energy, which is suffering from a commodity bear market; utilities, which can get hurt when interest rates rise; and materials which are currently being held back by a cautious global outlook.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.