Bad News Fails to Spook Investors

Equity markets edged higher today continuing a three day rally following on from a turbulent week.  There has been a substantial change in market behaviour since the start of 2013 as fear and volatility are becoming much more digestable. 

Equities have been the asset class of choice this year, as investors sought to take advantage of improving economic conditions mainly from the US.  After reaching record highs and rising almost 10% in the first three months, many investors have become cautious as this rise in equties has occurred very quickly given the level of corporate earnings and economic outlook.

We can expect equity markets to calm down somewhat as Q1 results begin to flow through, however what gives me cause for concern is the way news, especially bad news has been interpretted by markets. This year has already thrown a few curve balls at us.  Starting with Italy, their elections ended undecided leaving questions being asked about whether a governement can be formed to continue along the path agreed with the ECB and maintain their involvement with the Eurozone.  Whilst volatility spiked during this period, markets were remarkably unaffected.  There was an initial sell off on the Tuesday the results were annouced, however by the end of the week markets had closed higher.  Secondly, more Eurozone worries flowed through, this time from Cyprus as peripheral countries and their people were reminded how vulnerable they were as bank depositers faced haircuts.  This spooked the market again, having a slightly more significant effect than Italy, however yet again, over the following weeks, markets rallied back being pushed along by optimistic data out of the US.

More recent news surrounding North Korea, has been fairly localised.  South Korea has seen its markets and currency fall as a result, however global markets have been fairly reserved.

So why is bad news being taken so lightly?  This could be down to a number of reasons however it is evident that the psycological impact of bad news has been numbed over the past 5 years.  Since the credit crisis in 2008, we have seen consistent flow of bad news from Europe, then the Arab Spring, China's possible hard landing, US fiscal issues, the list goes on.  Investors have become used to this  and as a result markets can recover fairly quickly from the intial shock.  If the issues with Cyprus occured back in 2011, markets would have almost certainly reacted extremely to this. 

Another possible cause for markets to be bought back so quickly is the rotation into equity markets.  Many investors would have had a large exposure to fixed interest over the past 3 years, and now as bond yields reach record lows, there has been a rotation into equity markets (Great Rotation and the Hunt for Yield). This has certainly occured with the large amount of money sitting on the sidelines in cash.  As a result many investors see market pull backs as an opportunity to increase thier positions.  There is still a significant amount of money still on the fence, and this could continue to act as a support to markets throughout 2013.

A word of caution, when investors become complacent bad things tend to happen, so be wary of asset bubbles. 

In the meantime enjoy the ride, and if you are one of those investors still on the side line, climb aboard there is still plenty of opportunities out there.