Some dogs are noisy. House dogs are usually trained not to bite, but being naturally protective, they can use their bark as their main weapon to scare off threats.
A loud, snarling dog can be a very scary thing to encounter. But well-trained dogs often calm down, especially if their owner is there talking to them. It’s not uncommon to have a dog licking your hand moments after it seemed like it wanted to take your head off.
When the financial world starts barking, it can be quite frightening. We might not fear our physical head being removed, but we definitely can fear our wallets being emptied by prolonged economic decline accompanied by prolonged and possibly deep market decline.
Often the financial world acts like the dog that barks ferociously, but then sidles up and becomes your friend.
When the financial world barks, it sends cascades of bad news. So far this year, it’s been impossible to escape from this onslaught, as we see soaring consumer prices, rising interest rates, bogged down supply lines, war in Europe, and saber rattling in Asia between China and Taiwan.
Getting hammered by bad news day after day, week after week, for eight months causes people to sell. Fear of losing is a big thing.
But if the dog doesn’t bite, then all those people who sold out of fear have a problem. They now have to buy back in at possibly much higher prices, or decide to stay out and potentially miss out on the markets rebounding and going on to new record highs.
How do we know when the barking dog isn’t biting? When the bad news keeps coming, and the markets ignore it. The bad news no longer controls the direction of the market.
Why would that happen?
Any number of reasons. Unlike any generation before us, you and I have at our fingers enormous information resources. But big institutions have even greater resources at their command, and more money. With greater resources, they have the opportunity to know things that we don’t, or at least before we know them, and with far more money at their command, their actions can change markets.
So when bad news comes out and market don’t go down, or even go up, I don’t think, “They’re crazy. Don’t they know ____?” No. Instead, I think, “What do they know that I don’t know?”
There are a couple of reasons why this has worked so well for me in the past. And these reasons, in my opinion, are pretty durable.
The first reason is that the bad news is already known, and most money has already taken action based on it. This may be true even if the news seems new. Consider that every day there is news coming out of Ukraine. But the fact that there is a war in Ukraine that is disruptive to world trade is not new. Anyone with serious money has already taken whatever action they deemed necessary.
This example uses a widely known event, but it can also be true of events that are more obscure to the public but well-known in the financial world.
The point is that once the news is widely known, it becomes old news and no longer has the power to move markets.
This can also be true of events that have not yet happened but are widely anticipated. In these cases, most investors position their portfolios according to what they expect the event to be. Take an event like the quarterly GDP report. Everyone knows when the report will be released, and everyone in the financial world can get an estimate of what to expect. Once the report comes out, if it comes out as expected, it is no longer new. It’s old news. And nothing is more stale—and has less effect on markets—than old news.
The second reason I believe this approach works has to do with the flow of information. Almost anyone, anywhere in the world, can get information instantly. But that does not mean that it’s all equal. I don’t believe for one minute that I can get information as fast as or as thoroughly as the biggest financial companies in the world.
So when truly bad news comes out and the market rallies, this is sometimes because the big money—with all its computer power, information systems, and highly qualified analysts—knows something that I don’t know yet. There is something bullish going on that is even more important than the bad news, but it’s not yet widely known.
I can’t think of anything in a free-market society that can change this. So as markets and society evolve and advance, I expect this particular dynamic to persevere. When bear markets fail to go down on bad news, that’s a very good sign that the bear market may be over. The same is true in reverse for bull markets.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri.com These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.
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