Market Noise

Bad news is good news?

SP5002000When is bad news good news? Apparently when investors have spent the best part of a decade getting overly comfortable with the idea of Central Banks artificially pumping unprecedented levels of liquidity into financial markets. Markets remain extremely sensitive to even the slightest bit of news that feeds the consensus’ current obsession with trying to anticipate policy action around the world. As such, frequently we see positive economic news causing panic, while negative news is welcomed. Monday’s example was the S&P 500 briefly pushing through the 2,000 mark for the first time ever on the back of last Friday’s speech by ECB president Mario Draghi. Draghi’s acknowledgment that the Eurozone economy remains “uniformly weak” seemed to spur confidence rather than concern. Investors speculated about the increasing likelihood of quantitative easing from the ECB, ignoring the fact that the factors that would prompt such action are negative ones, and the path to QE may be very painful. It was also interesting to see how easily markets were able to suddenly forget concerns over issues such as Ukraine and Banco Espirito Santo that had only very recently weighed heavily on sentiment around the outlook for Europe.

One thing worth noting is that, while the S&P 500 touching a nice round number like 2,000 for the first time ever makes interesting headlines, the level of the index is relatively meaningless – people forget that earnings have been going up as well (which is what they tend to do). The price is not the valuation – the index is certainly not at all time expensive levels.

In any event, it is futile to try and predict when or how the ECB may embark on further stimulus. Furthermore, we would stress the importance of not over-estimating the link between policy action and genuine economic conditions (see Stuart Canning’s post http://www.episodeblog.com/posts/economics/should-we-care-about-forward-guidance from last August on this point). However, it is important to remain alert to potential risks and opportunities that may arise from meaningful episodic price action around noisy policy speculation.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.