The stock market can be turbulent at times. If it weren’t, it wouldn’t provide the superlative returns that it does. In order to get the 8-10% annual returns the stock market has historically provided, you have to be willing to stomach corrections (10% drops) that occur on average once every 2-3 years, and bear markets (20% drops) that occur on average once every 5 years.
Bear markets rarely occur out of the blue or simply because of “profit-taking.” Usually, there are events that are happening in the world that drive the stock market lower. With the decline comes uncertainty and the fear that the stock market could drop even further.
During these turbulent times, sometimes the best news for the stock market is no news.
Examples of Uncertainty
There are several types of uncertainty that can disrupt stock markets.
Financial concerns
During the financial crisis, there was significant concern that the global economy could crumble under the weight of the subprime mortgage crisis. After Bear Stearns failed in March 2008 and Lehman Brothers went bankrupt in September 2008, the market continued to decline for several months because of fears that additional banks would fail. The initial recovery from the financial crisis occurred when the bailouts by the U.S. government worked and additional banks stopped falling. In 2009-2011, every day that there was no news of a bank failure was a tailwind for the market to move higher.
After the financial crisis, global stock markets experienced several pullbacks because of the European sovereign debt crisis. It seemed like markets would regularly rise and fall based on increasing or decreasing fears that a major European economy would default on their debt. The concern was that one country defaulting on their debt would cause a contagion or domino effect that could cause other weak European economies to also default. Ultimately, this fear subsided and the sovereign debt crisis faded away from the headlines, allowing the bull market to continue.
Geopolitical concerns
The September 11th attacks is an example of a geopolitical event that affected financial markets. The stock market was closed for four trading days following the September 11th attacks, and the Dow Jones dropped over 7% on the first trading day after the attacks. The uncertainty of additional terrorist attacks, as well as the U.S. response to the attacks, caused uncertainty in the market. However, the market recovered all of its losses following the 9/11 attacks by the end of 2001.
As another example, the general market consensus leading up to the 2016 presidential election was that Donald Trump would be bad for the stock market, while Hilary Clinton would be good for the stock market. In the final days when the polls were favoring Hilary Clinton, the stock market rose in response to a likely Clinton presidency.
On Election Day 2016, the stock market dropped over 4% in the overnight futures market when it became increasingly certain that Trump would win the presidency. Investors worried that Donald Trump would come out with highly unusual economic policies that would hurt the American economy.
In the days and months following his election, Donald Trump ended up having economic policies that were more traditionally Republican and pro-business, and the stock market rallied significantly after his victory. In this case, no news (i.e. Donald Trump’s economic policies ended up being in-line with mainstream pro-business Republican views) lead to a rise in the stock market.
Economic concerns
The trade war between the U.S. and China in 2018 is an example of how economic uncertainty can cause stock market volatility. With each new round (or threat) of tariffs between the two countries, the stock market fell. The decline is due not just to the economic effects of the tariffs on the two countries, but also because of the fear of additional tariffs in the future. Every day that passes without news about a new tariff serves as a tailwind to the stock market.
The stock market hates uncertainty
Built into the stock market price is the uncertainty associated with financial, geopolitical, economic, and other concerns. If there is a catastrophic event (e.g. 9/11 terrorist attacks, Lehman Brothers goes bankrupt), the stock market declines significantly. In the absence of these things happening, the stock market rises.
The nightly news never reports that tens of thousands of planes land safely almost every single day. But when there is an accident, it is front-page news, sowing fear into airline travelers, even though traveling by airplane is the safest form of transportation.
Especially in volatile markets, sometimes its hard to discern why the stock market has risen. News outlets sometimes struggle to coin a storyline why the stock market rose when there was no news. They need to understand that in volatile stock market conditions, no news is good news, while declines in the stock market can usually be attributed to events that increase fear into the market.
Conclusion
The stock market typically rises quietly. Strong economic growth and low unemployment, as we have had the past few years, don’t make headlines. No news is good news. Uncertainty can cause stock market volatility, but if the fears do not materialize, the bull market continues. Try to avoid spending too much time watching the headlines — you’ll more likely be able to stay the course when the stock market declines.
What do you think? Have you noticed that the stock market recovers when uncertainty declines in the market?
[Charts courtesy of StockCharts.com]
No news is usually good news. But then again studies show all news is priced in within a minute of release. In fact the market tends to overreact in first day then come back. As such news isn’t particularly helpful.
I always focus on what the stock market does when there’s no news. THe market often uses the news as a trigger, but it’s the underlying trend when the media is quiet that counts.
Good article
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