March 13, 2014
Markets bounce back despite Ukraine tensions
Major global equities indexes gained ground during February, despite significant tensions in the Ukraine. The broad-based US S&P 500 advanced by an impressive 4.3 percent in local currency terms, ex-dividends, during the month. The gains, which put the index in positive territory for the year, provide yet another illustration why seasoned investors cast a wary eye over media “noise,” and focus more on structural changes.
Daily and hourly media reports regarding the Ukraine, which dominated the headlines during February, consistently linked developments there with major market moves. For example on March 3rd, the New York Times tied a market pullback to rising tensions. Yet the next day, on March 4th, the paper linked a market rise with declining tensions.
Yet by early March, despite the fact that almost everything that could go wrong in the Ukraine did, a six week chart of the S&P 500’s performance, shows a slow and steady increase. This suggests that markets almost completely looked past events there.
By the beginning of March the Ukraine had been hit with mass demonstrations, police crackdowns, a change in government, a Russian invasion of the highly strategic Crimean Peninsula, and a formal seizure of Sevastopol, a crucial port on the Black Sea. If developments in the Ukraine, had really had a major influence on markets, surely global equities indexes would have tanked for the month as a whole?
Markets react to a variety of factors….
The fact is that markets move based on a variety of complex factors, many of them structural, which many journalists either don’t fully understand, or have a strong incentive to overlook.
In today’s era of “Barbie and Ken at the news-desk,” journalists’ careers often advance or fall, based on how good they look, and the ratings they generate.
That generally incentivises a focus on easy-to-understand stories, with lots of visuals that keep eyeballs glued to television, laptop, iPad and other screens. Yet while the Ukraine indeed was a major international crisis, which merited significant coverage, when journalists began to link major equities market moves to developments there, they often went too far.
Together the Ukraine and Russia comprise less than 2% of the world’s economy, hardly enough to make even a tiny dent in global corporate profits or GDP growth forecasts. The one area where events might affect economic developments, through disruptions in Russia’s supply of natural gas to Europe, was often buried in news stories.
In fact market movements in recent weeks appear to have been more affected investor relief over the US Federal Reserve’s plans related to the tapering of its asset purchases. The central bank has indicated that the process, will unfold so slowly, with so many conditions attached to it that markets have been reassured that low interest rates, which boost the relative value of stocks, will be with us for a long time.
Focusing on visuals and sound bites
Sadly, journalism schools generally don’t provide students with the education to properly analyse such events. Pupils get little or no math, business, or economics training. The upshot is that when journalists interview experts about market developments, they tend to focus on “easy to understand” reasons, which provide good sound bites.
For example linking market movements, to demonstrations in the Ukraine, provides a much more exiting, visual and easier-to-understand story, than explaining to viewers the implications of the Federal Reserve’s “tapering.” Seasoned investment professionals understand this, and thus look much deeper than media headlines.
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Peter Diekmeyer Communications Inc.