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Volume 11, Edition 11 | March 21 – March 25, 2022

Climbing the Wall of Worry

Doug Walters, CFA
Stocks have a mythical ability to face a mountain of challenging headlines and climb “the wall of worry.” There may not be much academic backing to this theory, but investors need to be careful not to be left at the bottom of the wall.

Contributed by Doug Walters, Max Berkovich, David Lemire

The news is not good. Of course, it rarely is. It is hard to think of a time in recent history when we had a long stretch of positive global news. Part of that is attributed to some genuinely bad happenings, namely the pandemic and the war in Ukraine. But it is also thanks to news outlets that feed on worry. A “Stocks Tank” headline or “The Dow Fell 300 Points!” is always going to grab more attention than the more accurate and less sensational “Stocks Slipped 0.9%” version. While individuals are often influenced by these exaggerated headlines, savvy investors have proven the ability to climb this wall of worry.

The “wall of worry” is an unofficial investing term. You can find definitions across the internet, such as this one on Investopedia (Wall of Worry). It is the idea that the stock market has this almost magical ability to advance in the face of mounting bad newsflow. There is plenty of evidence of that to support this loose theory over the past few years. Take the pandemic, for example. Despite this global tragedy, the S&P 500 rose over 50% in 2020 and 2021. Now that was a steep wall! Today’s wall appears just as daunting:

  • The pandemic continues, and the next variant could be just around the corner.
  • War has broken out in Ukraine, shaking geopolitical stability and accelerating deglobalization.
  • Inflation is persistently high and exasperated by the war.
  • US politics appear more polarized than ever.

So are stocks poised to climb this latest wall? In the near term, nobody knows. What we do know is that stock prices are in large part a reflection of expectations for future earnings and companies have historically been good at finding ways to be profitable. There is no mystical explanation for the wall of worry. Companies face challenges with ingenuity, and savvy investors look beyond the near-term challenges to the long-term promise. Bumps along the way present opportunities for these patient investors.

We started this year with the S&P 500 down over 11%, and then Russia invaded Ukraine. Once again, the wall of worry grew. Yet since then, the index is up around 7%. Are stocks climbing the wall of worry? Maybe. But more likely, investors are rationally valuing stocks based on expected long-term earnings. Either way, as individual investors, it is important not to be daunted by the inevitable wall of worry. Hang on and enjoy the ride.

Headline of The Week

The war in Ukraine continued to dominate headlines, along with the knock-on effect of persistent inflation on consumers. The catchphrase of the week was “deglobalization.” A number of articles and letters spoke about how the Ukraine war and subsequent sanctions are likely to accelerate the decoupling of global economies. However, of most immediate interest to investors was the commentary from Fed pundits about rate hike acceleration.

3-2-1, Ignition, Liftoff

After kicking off “liftoff” with a 25 basis point (bps) hike in March, Fed is already pushing a more aggressive narrative.

  • Fed Chair Powell spoke on Monday about the need to move “expeditiously” to remove accommodation. He even discussed the potential need to move to a more restrictive level to combat inflation.
  • NY Fed’s Williams did not rule out a 50 bps hike if conditions warranted.
  • Wall Street analysts are increasingly forecasting a 50 bps hike in May.

US equity investors took this news in stride, with returns positive on the week, while bonds fell.

The Week Ahead

Help Still Wanted!

US Non-Farm Payrolls on Friday should be the biggest market mover next week.

  • The March jobs report is expected to have added 488,000 jobs.
  • With weekly numbers looking solid. The concern now is that the number will be held down because not enough people are looking for work.
  • A heavy focus of this report will be on wage growth, as the unemployment rate is expected to come in a tick lower than in February, at 3.7%.
  • Hourly wage growth is needed to keep up with inflation. A number less than 5.5% year-over-year would be disappointing.
  • The jobs report may be less impactful at the week’s end since the ADP Payroll Survey on Wednesday may steal some of the thunder.

Still Inflated

Personal Consumption Expenditures Index (PCE), the Federal Reserve’s preferred inflation measure, is out Thursday.

  • The index is for February, so it will not be impacted by the rate hike from the Federal Reserve.
  • The year-over-year change in inflation is expected to print at 6.7%, a larger pop than the previous month’s 6.1%.
  • Personal Spending and Income reports are expected to show income growth outstripping spending, which would indicate consumers being cautious and less confident in the economy.
  • The US consumer confidence report on Tuesday is expected to indicate the same thing, with consumers holding back due to the rise in food and energy costs.
  • The Consumer Price index in the European Union is also expected to jump 5.8% on the back of skyrocketing commodity prices.
  • The European Central bank will have an increasingly difficult time pushing back on aggressive rate hikes despite a weakening economy.

More Noise

Every bit of data is being used by bond traders to move interest rate expectations, so even less significant reports may move markets.

  • Both the US and UK will have a final look at 2021’s fourth-quarter GDP.
  • This is another round of revisions. Nothing new is expected from GDP reports.
  • The Case-Shiller Home Price Index for January and JOLTS report for February will be a little dated.
  • However, March ISM Manufacturing PMI and Mortgage Applications will be timely.
  • Federal Reserve’s John Williams, the President of the New York Fed and member of the rate-setting committee, will have speaking engagements. Rate Expectations will jump around based on what he hints.

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