Many investors were puzzled when US stocks recently enjoyed their best weekly gain in over two years. After all, the headlines have been ugly. War is ongoing and the Federal Reserve has been unexpectedly hawkish, warning it is prepared to hike rates by a half percentage point at its next meeting.
Many explanations are proffered – strong US economic data and corporate earnings; the idea that stocks are a decent hedge against inflation; investor faith in the Fed to tame inflation without hurting the economy.
The best explanation is that a lot of bad news was priced in; stocks had already fallen 15 per cent by the time of Russia’s invasion. Still, even this is an imperfect explanation – after all, how many predicted the S&P 500 would gain almost 10 per cent in the month following Russia’s shock invasion?
Uncertainty is unpleasant. Some bears manage this uncertainty by insisting this is a sucker’s rally, but is it? The same was said when stocks soared in the early days of the pandemic, but indices kept gaining.
Explaining every market movement can be emotionally satisfying, but it’s intellectually simplistic. Investors are better off tuning out the noise, sticking to their long-term plans and learning to tolerate investment uncertainty rather than wishing it away.
