Thursday, April 16, 2015

What's Keeping You Up at Night?

In their weekly sentiment survey, The American Association of Individual Investors (AAII) asked members what, if any, global events were influencing their six-month outlook towards the stock market.

"Responses varied, with several members listing more than one event. More than one in five (22%) respondents said that events in the Middle East are having an impact. Ongoing instability was the primary factor, though several respondents mentioned the framework for a possible deal with Iran. About 19% of respondents said that Europe is influencing their outlooks, particularly its rate of growth. The stronger U.S. dollar is influencing the outlooks of 15% of all respondents. A nearly equal number, about 11% each, said that the global economy and central bank policies are having an impact on their expectations for the stock market. Here is a sampling of the responses:
  • “Economic stimulus measures overseas may help to offset a fully to slightly overvalued U.S. market.”
  • “Growing unrest in the Middle East.”
  • “Iranian nuclear accord reaching finalization.”
  • “The continuing strength of the U.S. dollar.”
  • “The European Union economy seems to be stabilizing thanks to accommodative monetary policy.”

With 1/5 of respondents saying that events in the Middle East were a primary focus, we were reminded of a Barron's article we read this past weekend in which they offered why a deal with Iran might be good for stocks.  It's important to note how AAII worded the question.  By using "influencing" instead of a more worrisome term, perhaps they were leaving the door open to positive outcomes and the market responding favorably.  This is a crucial topic for investors as it's incredibly important to always consider all scenarios.  

As humans and investors, it's easy for our first inclination to be to want to feel "safe."  In this particular case, that would probably be to think about all the bad things that might happen if the Iran deal were to fall through and how to prepare for them.  It's often difficult, or better yet of secondary importance, to consider the potential positive outcomes of such situations and the Barron's piece works as a good example of that:   

"Good news is a rare commodity in today’s Middle East. But just maybe the tide is turning there, which will reduce the chance of a black-swan event emanating from this lawless, fractious precinct of the globe." 

A welcome reminder to always consider all potential outcomes when positioning for an event, time period, goal, etc.  As the saying goes, "The market doesn't like surprises."  Well, neither should its individual participants.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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