When Does Good News Become Bad News?
Weekly Notes With Tiho — Issue 5
Location: Ho Chi Minh City, Vietnam
The global stock market made a new record high last week.
And it's continuing to rally this week.
That’s good news, right?
It is said that the stock market climbs a wall of worry. And it has been climbing this wall since the start of last year.
In January 2016, panic selling gripped investors. This is precisely the condition that enables markets to bottom out.
Amongst many concerns, investors were extremely fearful of the consequences Chinese stock market crash will have on the world’s second biggest economy.
At the same time, global earnings growth was negative while industrial production and manufacturing were contracting.
World trade was pale and lifeless, like a sick patient.
Nevertheless, the stock market started to rally... building a wall of worry.
By the middle of 2016, investors had to worry about new concerns.
European banking sector was once again making front-page news. In particular, Deutsche Bank’s share price was sinking like a rock.
Bearish investors were making comparisons to Lehman Brothers.
Additionally, United Kingdom’s referendum vote on whether to remain or leave the Eurozone surprised all of the media and just about all of the investors, too.
Several famous hedge fund managers waged large bets on a stock market crash (if UK ends up leaving the EU).
Yet the market continued to rally.
By fall of 2016 attention turned to US elections. Some of the biggest and most prestigious hedge funds came out with dire warnings for the stock market, in case Donald Trump was to win.
Yet again, the market rallied and now sits at all-time record highs.
However, 2017 isn’t anything like 2016.
The current rise to new highs is not accompanied by a wall of worry.
It’s been replaced by optimism, complacency and good news. In recent months, optimism by consumers and small businesses has risen dramatically.
Trump did manage to ignite animal spirits, at least temporarily.
Furthermore, the Trump administration is attempting to reduce bureaucracy and reform the tax system.
Global manufacturing is expanding — and for the first time in awhile — the growth is synchronized around the world.
Meanwhile, across the Atlantic, the first round of French elections has been a relief to investors worried about "Frexit."
Also of note, recent earning and revenue growth are pretty solid.
Apart from geopolitical risks from North Korea, there isn’t a whole lot to worry about.
Naturally, investors have become complacent. This can clearly be seen with the Volatility Index dropping to one of the lowest levels in a decade.
Foreign stock markets, from Europe to Asia Pacific, are now approaching a significant overhead resistance.
Therefore, investors should entertain the idea that if markets bottom during a panic and climb the wall of worry, they ought to peak (at least temporarily) and correct during periods of good news.
While I see that the probability of a correction has risen — as others become complacent — my clients remain invested and 2017 has treated us well so far.
Year to date, Atlas Investor Portfolio has accomplished a 9.5% for a moderate risk strategy (14% historical volatility).
Make sure you read more about the Atlas Portfolio strategy and if you happen to have any questions — get in contact by clicking below and filling out the brief survey. I’ll get back to you within 24 hours.