Why Does the Stock Market Hate Uncertainty?
I have no doubt that many of you are scratching your heads on how the S&P 500 (SPY) has rallied strongly in the 2 sessions since Russia invaded the Ukraine....
I have no doubt that many of you are scratching your heads on how the S&P 500 (SPY) has rallied strongly in the 2 sessions since Russia invaded the Ukraine. I believe that 2 long time market maxims help tell the story perfectly. So we will focus on that for today's POWR Value commentary. Read on below for more….
(Please enjoy this updated version of my weekly commentary published February 25th, 2022 from the POWR Value newsletter).
Market Maxim 1 = Buy the Rumor, Sell the News
We hear this saying all the time around earnings season when a company rallies up into their report…then crush it…and then shares oddly tumble thereafter. The statement of "buy the rumor, sell the news" is the most logical answer.
Think about it this way. We all know that that investors are forward looking. That is why the market often tumbles 4-6 months in advance of recessions. Just as similarly the market bounces from bear market bottom long before there is evidence of economic improvement.
So with that forward looking anticipation investors place their trades so that when the actual event happens they oft take the profits off the table.
This idea provides a very good explanation behind stocks being volatile on the fears of a Russian invasion of the Ukraine, yet rallying when it actually happened. The rest of it can be explained by the following…
Market Maxim 2 = The Market Hates Uncertainty
When the path is unclear many investors sell first and ask questions later. This is true with any number of events over the years.
For example, the first wave of news on Omicron led to an immediate pullback in stocks. Especially for those most potentially harmed in the leisure and entertainment industry.
Yet once it was clear that Omicron was contagious, but not overly harmful to the economy, the market rallied back to the previous highs.
Or rolling back to September/October 2020 the market tumbled given the uncertainties over the Presidential election. That too was quickly rectified once that uncertainty was removed.
It is for this reason I said the following in my 2/22 Reitmeister Total Return commentary:
"This is a bull market til proven otherwise. However it is true that the market doesn't like uncertainty. And a potential military conflict is an uncertainty.
However, at some point it will become certain. And that may include some kind of cold war…or hot war with Russia. And oddly that uncertainty flipping to certainty will be a positive for the market. And that is why we remain bullish.
Remember the goal is to buy low and sell high. But if you already bought your shares, then that expression become "hold low and sell high". And that is why we will not be shaken off this bull before it runs higher once again."
Gladly we heeded this message in our approach to the POWR Value portfolio which allowed us to enjoy a two day tally of +3.84%.
Reity, what does this mean for the market in the days and weeks ahead?
The market is still susceptible to scary headlines coming out of the Russian situation. Everything that sounds like the odds are increasing that the US will be dragged into a real military conflict will be detrimental to the market.
And indeed the idea that Russia government hackers are messing with the US economy via cyber warfare will not be favorable for stocks (this is the higher risk in my opinion than on the ground military conflict).
Putting it all together, expect continued volatility in the short run. The downside risk in my opinion is around 4,000 on the S&P 500 whereas the upside reward with the bull market getting back on track is 5,500 this year.
But even if 5,000 is as high as we get in 2022 then you appreciate that upside reward is greater than downside risk. And that is why we continue to keep a bullish bias in place.
Yes, there are scenarios that would harm the US economy and lead to a much steeper decline for the stock market. I think the odds of those are fairly low. But if we did start to tip in that direction than we would move our portfolio into a more defensive posture.
Until then expect volatility with a bias towards upside action.
What To Do Next?
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All the Best!
CEO StockNews.com & Editor of POWR Value trading service
SPY shares closed at $437.75 on Friday, up $9.45 (+2.21%). Year-to-date, SPY has declined -7.83%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as "Reity". Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity's background, along with links to his most recent articles and stock picks.
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