The Independent Market Observer

Headline Risk Works Both Ways

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jun 18, 2019 3:49:35 PM

and tagged Commentary

Leave a comment

headline riskWeeks of worry—about trade, growth, and Europe—knocked markets down. But today we have the reversal. Mario Draghi, the head of the European Central Bank (ECB), has once again come out in favor of looser monetary policy and lower rates, which cheered markets globally. And this morning, President Trump tweeted that he would be meeting with China’s leader, which further cheered markets. As I write this, the S&P 500 is up by 1 percent and well over 2,900. This level takes us to within 1 percent of a new all-time high.

What a difference from three weeks ago when markets finished their most recent pullback on worries that the trade war was intensifying, that global growth (especially in Europe) was slowing, and that, once again, everything that could go wrong would. Then, the worry was that the decline would continue and worsen. Now, of course, with the ECB back in easing mode and the presumption that the Trump-Xi meeting signals the end of the trade war (why would they be meeting if not to sign a deal?), everything has changed.

In truth, the likely outcomes are not as bad as we thought then and not as good as we think now. Yes, the ECB may be easing, but that is because the growth fears are real. Yes, we might get a deal between the U.S. and China, but that will manage the conflict, not end it. Either way, the headlines will continue, driving new waves of buying or selling.

What is behind this vulnerability to headlines?

To be sure, markets have always reacted to the headlines. Recently, however, those reactions seem to be bigger and more frequent. I think there are two factors at work.

Policy has become more black and white. Historically, government policy has dealt in shades of gray. But the Trump White House has been more definite in both content and delivery. Now, tariffs are delivered explosively by tweet, rather than as a gentle hint in backroom trade talks. Policy conflicts have simply become more direct and more visible than they were before. This dynamic is something that might change with the next administration. For now, though, it has become the new normal. Expect it to continue.

Trends are starting to even out. Any changes, especially in systemic policy, now have proportionately more effect. When growth is strong, changes at the margin—in monetary policy, in trade—simply don’t move the needle that much against the prevailing trend. When growth slows, those changes—though no bigger in absolute terms—are proportionately more meaningful and generate more attention.

Although this situation is certainly unsettling, there is a positive effect as well. The more defined policy shifts and market reaction are a good gauge as to where the economy and markets actually are. Based on the data, the fundamentals remain solid, though softening. This set of reactions gives us another lens, in real time, as to what markets are thinking.

Risks not as bad as once feared

Right now, markets are clearly more cheerful. The recovery started with stronger consumer spending, which was a headline on its own and has now gotten a boost with the most recent headlines on trade and monetary policy. Although risks remain—and will no doubt show up in later headlines—the headlines today are showing that the risks are not as bad as feared. The market reaction confirms that.

When we talk about headline risk, we are often talking about the downside. Today’s events remind us that it can work both ways.

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®