Wall of Worries

The S&P 500, the MSCI World, and other global broad-market indexes are stubbornly hitting new highs despite nagging concerns about subprime, a credit crisis, slowing growth, inflation, you-name-it. But are these widely-felt fears enough to take the market down? Not likely—markets climb a wall of worry, as the following article reminds us:

What Could Topple Bulls "Wall of Worry?"
By E.S. Browning, The Wall Street Journal (*site requires registration)
https://online.wsj.com/article/SB118454728960567186.html?mod=todays_us_money_and_investing

This article identifies major "wall of worry" bricks—subprime, liquidity fears, and so on. But oddly, it states if one of these worries isn't "held in check" it could take the market down.

Wrong! Market worries can't get "too big." The wall of worry works because the worries are widely known and already reflected in today's market prices, or misinterpreted and powerless to knock stocks. The bigger the worry gets, the more the media squawks, the more widespread the fear, the more decidedly it won't impact the market. Hence, a wall of worry for stocks to climb.

But how can investors tell a "priced" worry from a legitimate worry? Here's just a few tactics we use everyday at MarketMinder to separate the news from the noise.

Put it in context. Are US consumers really tapped out and organizing a complete spending cessation, seriously hindering US GDP? The following article implies as much:

Weak Retail Sales Could Dampen Q3
By Michael Englund, BusinessWeek
https://www.businessweek.com/investor/content/jul2007/pi20070713_902597.htm?chan=top+news_top+news+index_investing

Note: A big chunk of June's retail decline was attributed to lower gas prices. Lower gas prices? Based on the media's indignant shrieks when gas prices move higher, you'd think lower gas prices would instigate dancing in the streets. But nevermind, this article reads as though one month's retail numbers are predictive of future stock returns and GDP growth—simply not true. Case in point: May's rosier-than-expected retail numbers didn't portend sunshine and rainbows forever and ever more, world without end, did it?

Dour headlines about cherry-picked economic indicators when there's so much positive news going under-reported tells you nothing—except there's no immediate danger of euphoria developing. Euphoria is anathema to bull markets. (See MarketMinder commentary "Run Bull! Run" – 06/04/2007)

Consult history. This article covers another well-canvassed topic:

Taking Credit's Temperature
By Alex Markels, US News & World Report

We've covered frequently at MarketMinder the myriad reasons subprime isn't a legitimate market worry ("Credit Crunch Conundrum" (07/12/07), "House of Horrors" (06/28/07), or "Don't Go Blind from the Subprime" (02/20/07) to name just a few). But this article itself tells you not to worry, if you know your market history:

"We're set up for a storm that could be much larger than Long-Term Capital," warns Rodriguez, referring to the hedge fund whose collapse in 1998 led to a brief financial crisis on Wall Street . . .

Long-Term Capital Management's implosion did lead to a very big market correction in 1998—a year that ended with a net positive gain of 29% for US stocks. Corrections are no fun to live through, but threatening investors with another "Long-Term Capital" is somewhat like threatening to take away a grumpy child's ice cream sundae and give him a pony instead.

Check the facts. But if you don't fear subprime, maybe you should fear a credit crunch:

Boom Times Are Here, but Cheap Capital is Not
By Cody Willard, The Financial Times
https://www.ft.com/cms/s/91dbdae6-3153-11dc-891f-0000779fd2ac.html

The article warns of imminent bad times as the easy credit driving this bull dries up. Very scary! Except where's the evidence? Anyone with access to the Internet can see 10-year US Treasury rates stand at about 5.05% today—lower than a year ago! Just saying "the era of cheap money is over" doesn't make it so. Check your facts before falling prey to scare tactics. The facts here don't support the fear.

These articles (and thousands more like them) contribute to a healthy Wall of Worry. The underlying concerns are easily picked apart with a little skepticism and access to a basic finance Web site. Let the wall of worry grow—the bigger it gets, the longer the bull has to run.