There have been a few contradictory signals in the last few days when it comes to stocks. Earnings have been mixed, with Facebook (as suggested here ), Apple (AAPL) and Ford (F) being among the big names beating expectations. On the other hand, Dow components AT&T (T) and Caterpillar (CAT) disappointed. Even within those numbers there was inconsistency, AT&T had revenue growth, while CAT missed the top line estimates by a significant margin. Economic indicators are no clearer. Confidence, both consumer and business, is improving, while still low. Growth overall is slow, but it would seem that the housing sector, such a large part of the problem since 2008, is recovering apace.
Look overseas for direction and the situation gets worse, not better. A slowdown in China was one of the main reasons for CAT’s miss, but, this morning GM (GM) reported significantly better results in Europe and beat expectations there by around a third. In other words, just as Europe seems to be getting its act together, China slows somewhat. Contradictions are rife.
The thing is, though, economic indicators and earnings clues are rarely clear and straightforward. There is always a lot of noise. What usually pays off is to assess what part of the noise investors and traders are hearing. Is the market focusing on good news or bad?
So far this year, investors and traders have been focused on the good. The S&P 500 is up around 18%. It is tempting to think that this has gone too far, and that a correction or collapse is coming anytime soon. In the last couple of days, however, the focus has shifted, and anything good has been swallowed up by worries about the bad news. There has been no dramatic drop, but we have closed lower for two days in a row.
This is a good sign for investors. When only great things permeate the wall of noise, and the market soars whatever happens, the turnaround can be ugly. When rationality returns, and each thing is assessed on its own merits, the chance of a full-blown collapse is reduced significantly. While traders have their rose colored spectacles off, some volatility over the next week or so would come as no surprise, but the overall upward trend is intact and we could be heading for a banner year for stocks.
The tendency that we all have to focus on the sensational is natural, but it can be an extremely dangerous habit for investors to get into. Traders are paid to overreact to everything, and will continue to do so, but for those with an investment horizon of more than one day, ignoring the day to day noise is a must.
If that has become difficult over the last few days, take a look at the chart for the S&P 500 over the last year.
You don’t have to be a chart reading genius to see that the low is on the far left and the high on the far right. If the last couple of days of wobble have you nervous, however, I want you to look at the ten or so short periods when the market dropped. Each one felt bad at the time, but on reflection represented a great buying opportunity. As I said, nothing much has changed, so if this drop continues there is no reason to believe this time will be any different.
The Fed talking about tapering caused the jitters a month or two ago, but it now seems that the market, if not the economy, is set to take that in its stride. We know it will happen sometime, but we have still recovered any lost ground quickly. Oh, and don’t forget, the Fed is still pumping $85 Billion per month into the system, even as the talk of reducing the amount.
As a writer, it is tempting to join the sensationalists. “The end is nigh, panic now!” draws more readers than “Things stay the same, nothing much happens!” as a headline, but remember, when an upward trend is intact, “things stay the same” is good news.