News Doesn't Move Markets, It Creates Noise

News Doesn't Move Markets, It Creates Noise

Posted on February 04, 2020

Market State 2 (Bullish): Following the market’s (S&P 500) recent pullback, short-term supply and demand indicators turned negative, putting the market in a bullish Market State 2 (it previously was in Market State 1).  The characteristics of Market State 2 are as follows:

Long-term: Positive
Volatility: Low
Short-Term Supply and Demand: Negative
According to Canterbury Studies, out of 227 periods of being in Market State 2, the S&P 500 has reverted to Market State 1 about 74% of the time.  The next closest Market State is Market State 6 at 15% of the time.
Canterbury Volatility Index (CVI)- CVI 54: Due to some relatively larger swings than we have seen in the last few months, volatility has risen from a low point of CVI 43 to its current position at CVI 54.  It has been mentioned that we were likely to see outlier days since the market had been in a state of extreme low volatility.  When this occurs, you are more likely to see a “spike” in volatility that is coupled with some outlier days. In fact, we have not seen a day beyond +/-1.00% since October 15th.  In the past week alone, there have been 3 days beyond +/-1.00%, with the largest of those being Friday’s -1.77% day.

Volatility is not random.  There are periods like we saw over the last few months where volatility gets extremely low.  Then there are periods where we see some days beyond +/-1.00% or even outlier days clumped together.  Overall, the market has seen low volatility for the last year, but there will come a day when volatility gets extremely high as well. This is why monitoring for changes in volatility and market environment is extremely important.

So, what caused the recent small spikes in volatility? I am sure by this point you have heard about the Coronavirus sweeping through China.  The outbreak has killed beyond 300 people and is starting to spread outside of China.  This notable news event may sometimes be attributed to nervousness in the markets.  So, did news of the spread of the Coronavirus cause a spike in volatility, or did it just tip the scale that was already set in place by extreme low volatility?

We have hammered it home through the past few weekly updates that the market was in a state of extreme low volatility.  Extreme low volatility is like the squeezing down of a spring: the more the spring gets compressed, the more likely it is to “pop” or have a “spike” in volatility.  This is exactly what happened.

News does not drive the markets.  News drives market noise.  The stock market’s reaction to a news event is largely dependent on the state of the current environment.

Market history rarely repeats itself, but it does often rhyme.  The current event we are seeing (Coronavirus) is very similar to a market event we saw back in 2014: Ebola.

Back in July of 2016, we wrote a weekly update centered around Ebola.  Referenced in that update were headlines such as “It could Change the Economy of the World (Bloomberg Markets, Sept 25, 2014)” and “Wall Street Tumbles on Ebola Fears (Wall Street Journal, Oct 1, 2014).”  The events leading up to Ebola were also similar:

Excerpt from the Canterbury Weekly Update on 9/22/2014:
Keep in mind that extremely low volatility will sometimes bring the "one day outlier” we have discussed many times in the past. Markets are supposed to move. Slow markets mean complacency among investors. Complacency will sometimes end with a knee jerk reaction to an unexpected short-term event. The important point to remember is that such moves are just part of the random market noise and will have little impact on the overall trend.

From September 25, 2014 to October 15, 2014, the S&P 500 saw a volatility spike and a few outlier days.
For something that was supposed to “change the economy of the world” and an event that caused Wall Street to “tumble,” the S&P 500 had a peak to trough decline of -7.40%, and then rebounded to a new high over the next twelve days. Ebola was simply the news that caused some pent-up pressure from extreme low volatility to be released.

There have been several other newsworthy events in history that had very different impacts.  For example, the JFK assassination, which had massive historical implications, occurred during a bull market. At that time, the market dropped 3% and then rebounded to a new high a few days later. Brexit, which occurred back in 2016, was also in a bull market, and again the market dropped 3% and then rallied like it had never happened. On the other hand, events like President Eisenhower having a heart attack (and surviving) or 9/11 both occurred in a bear or transitional market and saw the stock market experience much higher volatility.  The impact of these events had less to do with their severity and more to do with the overall market environment at the time.

Portfolio Efficiency
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark.  We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor.  The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency.  These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score.

The Canterbury Portfolio Thermostat is currently efficient for today’s bullish market environment.  The Portfolio Thermostat has low volatility and an efficient Benefit of Diversification to deal with potential outlier days.

Bottom Line
News events can drive market noise, but the impact of the event is largely dependent on the market environment.  An event like Ebola, and now the coronavirus was preceded by extreme low volatility and caused the market to release some of that pressure.   We will see how the market shakes itself out from here following the recent spike in volatility.  For now, the market is still bullish, and volatility is still low. 

Markets are adaptive.  They go through many different phases of volatility: extreme low, low, increasing, high, and extreme high to name a few.  Investment portfolios should also be adaptive, or in other words capable of making adjustments to navigate changing market environments in real time. 
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of compl