We need “The Wall”.
No – I am not talking about the proposed border wall between the US and Mexico. I am talking about the “Wall of Worry”. The “Wall of Worry” is not a physical wall. “The Wall of Worry” is made up of everything that investors think may knock the stock market down a large amount. This could be bad economic data or negative geo-political headlines. It could be a looming election, government shutdown or a possible trade war. You can build “The Wall of Worry” with just about anything!
“The Wall of Worry” varies in size at any given time. Sometimes “The Wall” is low – investors and talking heads see great times ahead! At other times, “The Wall” is huge – insurmountable even. At these times, negative headlines abound. Financial news channels will run their “Markets in Turmoil” specials. Mainstream news outlets will lead off the nightly news with the point move in the Dow Jones Industrial Average. It will seem like stocks will never rise again!
One of the great Wall Street adages is: “markets climb a wall of worry”. When “The Wall of Worry” is high, investors sell and move to the sidelines. Financial advisors may delay putting new client money to work. As the news gets less scary, those funds come back into the stock market and push up prices. This is “climbing the wall of worry” – when the gloom and doom scenarios fail to play out, investors feel more confident and can push the market higher.
People love to point to events and dates on a calendar and say, “get out now while you still can” or “reduce risk before the event”. Just over the past three years we have a had a number of “events” that fit this description: US elections, French elections, Italian elections, the Brexit vote, Chinese currency sell-off (2016 and 2018), oil market collapse and most recently, trade wars. These events looked scary before and even during the event, but they were all just bricks in a “wall of worry”. Once the events passed, markets continued to move higher. Staying invested through these events is how we earn our risk premium*.
If you are a long term investor, you should love a tall “Wall of Worry”. A tall “Wall of Worry” can lead to great future returns as money flows back to risk assets if the headlines get less bad or even good again. I should also add that long term investors can ignore the news flow altogether, choosing instead to focus on long term financial goals. After all, “markets will fluctuate” (to paraphrase the famous J.P. Morgan quote) – it’s what they do.
Here are a few ways to gauge the “Wall of Worry” in real time:
AAII Investor Sentiment Survey (less “bulls” than average and more “bears” than average equals a high “Wall”): http://www.aaii.com/sentimentsurvey
USA Today – Fear and Greed Index (“Extreme Fear” reading equals a high “Wall”): http://money.cnn.com/data/fear-and-greed/
Charles Brown is a Portfolio Manager and Financial Advisor at M. Brown and Associates in Naperville, Illinois
*Risk premium is defined as the return investors are expected to receive over and above the “risk free” rate of return (cash or money markets) by taking on the risk inherent in a given asset.
**The above article is informational in nature only and is not a recommendation to buy or sell securities. All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information. All investments carry a degree of risk. Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.
***Securities and advisory services offered through Ausdal Financial Partners, Inc., 5187 Utica Ridge Road, Davenport, IA 52807 (563)326-2064. Member: FINRA/SIPC. M. Brown & Associates, Ltd. / M. Brown Financial Advisors and Ausdal Financial Partners are independently owned and operated.