Despite all the negative headlines and huge event risk, markets have continued to push higher over recent months. Today is the last day of the third quarter and so far the benchmark domestic S&P/ASX 200 is up 7.07 per cent versus 6.24 per cent for the S&P 500.
Interestingly, over the same period the VIX volatility index, or fear index as its better know these days, is down 13.11 per cent.
This sort of price action, of markets moving higher in contradiction to bearish headlines and significant economic headwinds, is typical for markets emerging from major bear markets/recessions. In industry-speak it’s referred to as ‘climbing the wall of worry’.
Investopedia explains the Wall of Worry as follows: While a "wall of worry" may sometimes consist of a single economic, political or geopolitical issue significant enough to affect consumer and investor sentiment, it more commonly comprises concerns on numerous fronts. The markets' ability to climb a wall of worry reflects investor confidence that these issues will be resolved at some point.
This is exactly what we are witnessing at the moment. There are so many events/problems to focus on yet the market continues to move north. European debt concerns, Chinese slowdown, a US presidential election and the US fiscal cliff are a couple of the bigger ones hanging over markets.
During the phase when the market is recovering from big events, most recently the GFC and its broader ramifications, is one of the toughest times for investors. The recent bear market has made so many people ‘give up’ on equities as an asset class. Yet now they simply can’t understand how and why the market can be going up given the dire state of the global economy.
This is a classical situation where one needs to be able to separate what they think should be happening with what is actually happening. It also helps to understand that the market is a leading indicator and generally moves about three to six months ahead of the underlying economy. Currently, judging by the headlines and events, the world doesn’t look much better than financial Armageddon, but financial markets paint a different picture. One where the market is moving higher despite these concerns.
More recently, this week we’ve seen markets starting to pullback a little, with concerns in Europe getting a bit more air time. However, if we delve into the price action a little further we continue to see positive signs. Every time the market has opened the session lower, it has found strong buying support early and then managed to grind its way higher for the remainder of the session.
From a market psychology point of view, this is encouraging as market participants are looking to buy the pullbacks. On the contrary, during a downtrend the underlying psychology sees traders looking to sell the rallies. As long as this remains, the market should continue to be very well supported.
MARKETS SPECTATOR: Scaling the wall of worry
Despite the doom and gloom in both the headlines and on main street, investor confidence in the markets is strong. And markets able to climb the 'wall of worry' can point to a broader turnaround.
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