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No Good News is Bad News
Bulls and Bears Battle for Control of Next Market Move
By Noel Lamb, Chief Investment Officer, North America
Russell Investment Group
Global Leaders in Multi-Manager Investing
September 2, 2004
The market is often seen as a tussle between bulls and bears. Usually one is winning at the expense of the other. These days neither is scoring a decisive victory.
The lead swings between the two on an almost daily basis, with the bears having notched an overall lead so far in the third quarter. However, the eventual winner for the next leg in the market's history will probably be decided in the next couple of months.
Which will it be?
For the bulls to come out on top, they need a series of events seen by market participants as good news. Without such good news, the market is left to the bears, who capitalize on the bad news and send the market downwards.
Optimism vs. Status Quo
A look at recent market movements shows that when investors learn of economic statistics that restore confidence in an optimistic scenario — such as a drop in the oil price, economic growth, or a sense the US Federal Reserve will slow rate increases — the market reacts with short upward moves.
Without that dose of optimism, however, the bears take control and the market slides downhill. Higher oil prices, fear of inflation and a continued threat of global terrorism are nothing new, but they all raise questions over the sustainability of the economic recovery. Any sign they are gaining momentum drives investors into defensive mode. They retreat to the sidelines and stocks lose their steam.
We have seen a series of examples of the tug-of-war between the two forces recently.
On August 10, 2004 when oil prices reached a (then) record high of US$44.99 a barrel on the New York Mercantile Exchange, the S&P/TSX Composite Index ended that week down 3.3%, while the Russell 1000® Index lost 4.9%.
Investors simply had little in the way of optimistic news to encourage them.
But good news arrived on August 17, 2004. US stocks, as measured by the Dow Jones Industrial Average rose 18.3 points after an unexpected drop in consumer prices encouraged investors that the US Federal Reserve may be able to slow the pace of interest rate increases.
Investors jumped back into the market again on August 18, 2004, gaining confidence from the absence so far of any terrorist activity at the Olympic Games, following an incident-free Democratic Convention as well as the realization that a number of stocks were trading at bargain levels in terms of historical valuation measures.
But the markets slowed the following day, as oil prices climbed to US$47.50 a barrel and the good news slid into the background.
Deciding Factors
Among the areas that will determine the nature of the news in the next couple of months will be investors' views on the outcome of the US presidential election. With polls indicating that the race is too close to call, investors are reluctant to commit themselves. The market hates uncertainty and only when a clear trend emerges will it react. If historical trends prove true, whatever the outcome, as long as uncertainty is removed, markets may react positively.
Also, any signs of turmoil in areas where much of the world's oil is produced — Saudi Arabia, Russia, Venezuela — is likely to set investors back into defensive mode once more. However, oil prices dipped to US$43.28 a barrel as of August 26, 2004. The see-saw price fluctuations almost seem as if oil regulators enjoy toying with jittery investors who react to short-term events.
Some who decide they want to get ahead of the next big market move may be tempted to bet on the direction they see stocks taking in light of the news — investing in stocks if they believe optimism will prevail and bailing out if they are convinced the news is destined to become worse.
On the other hand, those who are prudent investors may benefit by diversifying their investments among stocks, bonds and real estate so that whatever happens in the coming months they will be ready for it.
Copyright© Frank Russell Canada Limited 2004. All rights reserved. See Important Legal Information. Date of first use: 9/2/04.
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