by John Rubino
Big companies report blow-out earnings. Home prices are soaring. North Korea promises to end its nuke program, possibly averting another Asian war.
And stocks fall.
Does the news no longer matter? No, it doesn’t. But it never did. In a world this complex, big things both good and bad are always happening. So the events themselves are less important than our interpretation of them. In other words investor psychology is what really matters. And that has suddenly turned dark.
(New York Times) – The stock market is forward-looking. That’s a problem when there’s not much to look forward to.
Stocks sank for the fourth-straight day on Tuesday, as investors looked past a series of outwardly positive earnings reports and fixated on threats to the nine-year-old bull market.
Foremost among them is the Federal Reserve. Super-low interest rates from the central bank have fueled the rally, pushing up the prices of stocks and bonds since the Great Recession.
But that was then. Now, the Fed is slowly withdrawing some of its support. It is shrinking its portfolio of government bonds and lifting interest rates. As a result, a yearslong tailwind for the stock market is disappearing.
The new environment is evident in interest rates on government bonds, closely watched by many investors. The yield on the 10-year Treasury note touched 3 percent in trading early Tuesday. That benchmark interest rate — which influences the price of borrowing for both consumer loans and corporate bonds — has not been that high since early 2014.
Other pressures rattled the markets, and worries began to set in after 3M and Caterpillar reported a gloomy outlook.
The threat of a trade war, or even a real war, is unnerving investors. Oil prices have surged higher because of tensions in the Middle East, as well as President Trump’s public musings about withdrawing the United States from its nuclear deal with Iran.
Those rising commodity prices represent something of a double worry for investors. For one, they feed into price inflation, making it even more likely that the Fed will continue to raise interest rates. (One of the Fed’s main objectives is keeping prices stable.) At the same time, higher commodity prices eat into profit margins for companies, which is bad for their stock prices.
Investors were heartened by the tax cuts, said Evan Brown, director of asset allocation at UBS Asset Management. But their focus has shifted since then.
“The market’s attention is rotating to other things, and one of those things is rising inflation and rising yields,” Mr. Brown said. “One of those things is the potential for increasing trade tensions.”
The above article presents a litany of things to worry about. But in a different psychological environment (2017 for instance) investors would just ignore them and focus on how rising earnings will turbo-charge corporate share buybacks or how higher interest rates revive fixed income profits or how a stronger dollar implies that foreign capital is pouring in. Or how Amazon and Google were going to take over their parts of the world.
All of these good things are real, but none matter if they don’t fit into the prevailing mental landscape. And this landscape is as cyclical as anything else, with long happy stretches being followed by long dark ones.
Historically this kind of a shift has put air pockets under the prices of investments that depend on extrapolating good times to infinity. The Nifty Fifty of the 1970s, junk bonds of the 1980s, tech stocks of the 90s and bank stocks of the 00s all plunged when investors decided that a bird in hand was worth more than two in a distant bush. Now it may the turn of the FANG stocks and their peers. Most are great companies, but they might still be worth only half as much to a pessimist.