The Acceptance of Market Uncertainty

Financial news this week will be dominated by two things: Australian bank profits and President Trump and Kim Jong-un’s spat over who has the ‘biggest weapons’.

Both National Australia Bank Ltd [ASX:NAB] and Commonwealth Bank of Australia [ASX:CBA] dropped their results last week. NAB announced a record profit of $1.7 billion for the year. While CBA, the largest stock listed on the ASX, shared its eighth record-breaking profit in a row, with $9.88 billion reported for the 2017 financial year.

Both banks posted a strong rise in profits on the back of increased mortgage-lending activity. What’s more, both banks said ‘bad and doubtful’ debts had fallen over the financial year.

Neither bank mentioned the total number of accounts in arrears. That’s internal data only. For debt to become bad and doubtful, a customer must have debt with no repayments made for 90 days. This dataset doesn’t include the people who make credit cards or mortgage payments later than the due date — they are in arrears. But those are always the most interesting numbers.

Australia and New Zealand Banking Group [ASX:ANZ] and Westpac Banking Corporation [ASX:WBC] will follow in the next couple of weeks. What to expect? More profits all around, thanks to our obsession with housing debt.

Resistance to fearmongering

With the stupendously profitable Aussie banks out of the way, this week you can look forward to more blanket media coverage about what might happen between Donald Trump and Kim Jong-un.

As I pointed out on Thursday last week, the markets haven’t really cared at all.

Even the Korean Composite Stock Price Index [KOSPI], the major index for South Korea, fell 3.16% last week. Given all the rhetoric on nuclear bombs on the Korean Peninsula, you’d think the South Korean market would panic just a little. But a 3% fall in a week doesn’t amount to panic.

More broadly, global markets don’t seem to be overly concerned about the political chest-puffing. The Japanese Nikkei was down 1.14% for the week. China’s CSI 300 index dropped 1.62%. The Dow Jones trickled down 1.02%. And, locally, the XJO only fell 0.62%.

Yet, hasn’t this blanket coverage created a feeling of unease for investors?

Based on the relentless press surrounding the subject, you’d think this uncertainty would start to show up in the markets.

But it hasn’t.

In fact, we are far better at investing through uncertain periods than we think.

Check out this chart from JPMorgan:

Geopolitical Anxiety Index

Source: ABC News Online
[Click to enlarge]

This graphic shows you all the major geopolitical events going back to 1988.

Basically, the geopolitical anxiety chart tells you that, as far as markets go, collectively we act as if we’ve been through worse.

A crude chart of the Dow Jones over the same period confirms this. Aside from the market panic in 2008 and the US recession in 2001, the major geopolitical events haven’t slowed down the broader market. The Dow has managed to move higher in spite of threats of war — and actual wars even.

Dow Jones Industrial Average — 1988–2017

Dow Jones Industry Average

Source: Google Finance
[Click to enlarge]

However, Christopher Louney from RBC Capital Markets has a better explanation. The way he sees it, without the actual terrifying event occurring itself, the market simply won’t react, writing:

Market attention has coalesced around gold not trading higher on the back of numerous geopolitical risks and political uncertainty in the market — painting it as a failure. While legislative, security, and economic risks abound, none of these risks have yet to truly materialize into a risk-off (gold positive) event. The market certainly has gotten used to uncertainty and the high level of geopolitical risk, thus leaving gold to trade against the dollar, equities, rates, etc. In the context of uncertainty being the new normal, it will take material events rather than just the risks themselves to really move the needle. It is those possible events that give ongoing merit to the risk overlay trade — something we have been talking about for some time now.

Rather than watching a market melt at mere words, investors continue to have resilience to fearmongering. This could be because access to credit is cheap, as a result of low interest rates. Leaving many investors little choice but to chase returns offered in securities.

Nonetheless, investors — unlike the media — are seeing the current chatter for what it is: a war of words between powerful political puppets.

In other words, there is still money to be made in the markets, and we are getting pretty good at bouncing back from major stock market corrections.

Let me show you what I mean:

S&P 500

Source: The Washington Post
[Click to enlarge]

Above, The Washington Post has done some basic number-crunching.

They’ve listed 18 significant historical events dating back to 1940 (when the US entered the Second World War). They’ve calculated the rise and fall of the S&P 500 over certain periods from the day of the event, all the way to a little over eight months after the event.

Only in six of the 18 events was the market still in the red. It means that, on 12 occasions, the S&P 500 was better off historically after significant events. In other words, there was money to be made during and after the event.

I have no idea how this battle of egos is going to play out.

But I do know an investing opportunity when I see one. The markets aren’t running in fear, and neither should you. Don’t bow out of the market yet. Click here to see what other investors are missing out on.


Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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