The stat explaining why the stock market gets so much negative news coverage 📺
Plus a charted review of the macro crosscurrents 🔀
📈The stock market climbed to all-time highs, with the S&P 500 setting an intraday high of 5,878.46 on Thursday and closing high of 5,859.85 on Monday. For the week, the S&P rose 0.8% to end at 5,859.54. The index is now up 22.8% year to date and up 63.8% from its October 12, 2022 closing low of 3,577.03.
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The stock market usually goes up. Historically, prices have been in bull market over 80% of the time. Investors who can commit the time usually do well. Just this past week, the market rallied to new highs.
If this is the case, then why does so much news about the stock market seem to be negative?
As we’ve discussed before, negative stories tend to draw more audience interest than positive ones. This includes bearish warnings about what’s to come. Some news outlets capitalize on this behavior by giving outsized coverage to bad news.
But there’s another much simpler explanation: The stock market experiences a lot of down-days.
“On any given day in the stock market, your odds of a positive return are just 53%, little better than a coin flip,” Creative Planning’s Charlie Bilello.
If you’re in financial news, and you have to report on the markets every day, then about 47% of your days come with the stock market trading lower that day.
Unfortunately, most people won’t accept that prices are down that day “just because.”
That brings us to markets reporters and editors — one of which I have been in a variety of capacities over the last 18 years — who are in a very tough spot. All of their reporting and researching may have them conclude that the balance of news and risks is positive. But if prices are down, many are still under pressure to spin up or back into some narrative.
This leads to weird headlines like “Stocks fall as traders take profits” or “Stocks close lower as optimism fades” or “Stocks pull back on heightened uncertainty.”
Meanwhile, there’s never a shortage of bearish pundits happy to offer quotes with their thoughts on why prices are down on a given day. And their bearish assessments seem much more compelling when the live charts we’re all looking at are red. Sometimes, they’re right. Most of the time, they’re just amplifying the noise.
Even when a news outlet is unwilling to commit to a narrative, a straightforward headline like “Stocks Fall” can still be unsettling.
And reading “Stocks Fall” 47% of the time you check on the markets can be very unsettling, even when these down days are often occurring during bull markets.
All of it makes for a lot of investor angst. It’s no wonder why many people will believe the stock market is down during periods when it’s actually up.
What are we to do 🤔
To be clear, I’m not anti-news. I watch and read the big financial news publications every day. There are lots of incredible reporters and market experts providing great insights.
But I believe investors need to be mindful of what they’re getting into when they tune to a business channel, load up a business news site, or open a business newspaper.
Understand that stock prices will be volatile over very short periods. The markets and the economy are “full-on Monet,” which is to say that the numbers will zag zag in the short term even when they’re trending higher. So prepare for lots of voices to explain why one day’s bad news could be the beginning of something worse even when it’s just noise.
To that same point, when an expert gives their forecast for the market, make sure you know their timeframe. If you have years to invest, an expert’s one-day or one-year forecast might lead you astray. (By the way, an expert who’s bearish in the near term may also be bullish in the long term.)
And if you can, take a little time to understand the biases of the individuals and entities advancing their views. Are they selling ad space? Are they advancing political interests? Are they in the business of monetizing fear? Not everyone is interested in helping you build wealth.
All that said, TKer is here to help. TKer is written for long-term investors in the stock market. Two of our more popular reads are the weekly “Review of the macro crosscurrents” and “Putting it all together”* sections. The former provides roundups of new data with context and the latter provides an up-to-date big picture summary for that data.
While the short-term noise is often unsettling, TKer continues to find that the long-term outlook for the stock market and the economy remain favorable.
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*EDITOR’S NOTE: Since January 15, 2023, TKer’s weekly “Putting it all together” section began with a sentence reiterating that we continue to get evidence that we are getting the bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession. Thanks to reader feedback, I’ve tweaked this section to be more stock market forward. Keep sending me feedback. I’m always looking for ways to improve TKer!
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Related from TKer:
Review of the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🛍️ Shopping rises to new record level. Retail sales increased in September to a record $714.4 billion.
Strength was broad with growth in clothing, health and personal care, grocery, restaurants and bars, and department stores.
For more on the consumer, read: The state of the American consumer in a single quote 🔊 and There's more to the story than 'excess savings are gone' 🤔
💳 Card spending data is holding up. From JPMorgan: “As of 11 Oct 2024, our Chase Consumer Card spending data (unadjusted) was 1.5% above the same day last year. Based on the Chase Consumer Card data through 11 Oct 2024, our estimate of the U.S. Census October control measure of retail sales m/m is 0.78%.“
For more on personal consumption, read: The state of the American consumer in a single quote 🔊
👍 Inflation expectations remain cool. From the New York Fed’s September Survey of Consumer Expectations: “Median inflation expectations remained unchanged at 3.0% at the one-year horizon, increased to 2.7% from 2.5% at the three-year horizon, and increased to 2.9% from 2.8% at the five-year horizon. The increases at the three- and five-year horizons were most pronounced for respondents with at most a high school degree.”
For more on inflation, read: Inflation: Is the worst behind us? 🎈 and The Fed closes a chapter with a rate cut ✂️
💼 Unemployment claims tick lower. Initial claims for unemployment benefits declined to 241,000 during the week ending October 12, down from 260,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
🏠 Homebuilder sentiment improves. From the NAHB’s Carl Harris: “While housing affordability remains low, builders are feeling more optimistic about 2025 market conditions. The wild card for the outlook remains the election, and with housing policy a top tier issue for candidates, policymakers should be focused on supply-side solutions to the housing crisis.”
🔨 New home construction falls. Housing starts declined 0.5% in September to an annualized rate of 1.35 million units, according to the Census Bureau. Building permits fell 2.9% to an annualized rate of 1.43 million units.
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.44%, up from 6.32% last week. From Freddie Mac: “The 30-year fixed-rate mortgage increased for the third consecutive week, moving closer to 6.5%. In general, higher rates reflect the strength in the economy that is supportive of the housing market. But notably, as compared to a year ago, rates are more than one percentage point lower and potential homebuyers can stand to benefit, especially by shopping around for the best quote as rates can vary widely between mortgage lenders.”
There are 146 million housing units in the U.S., of which 86 million are owner-occupied and 39% of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy on Tuesday rose two tenths of a point last week to 61.4%. Tuesday was the peak day for all 10 tracked cities, following a dip in occupancy the previous Thursday, 10/3, which was Rosh Hashanah. New York City had the largest decline on Thursday, dropping 8.3 points to 50.1%. The average low was on Friday at 32.7%, down half a point from last week.“
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
😬 This is the stuff pros are worried about. According to BofA’s October Global Fund Manager Survey: “On tail risks…33% of FMS investors see geopolitical conflict as the #1 biggest ‘tail risk’ … up from 19% a month ago. Concerns over accelerating inflation continued to rise from 18% to 26%, and concerns about US recession faded to 19% (from 40%, was the top risk in September).”
The truth is we’re always worried about something. That’s just the nature of investing.
For more on risks, read: Sorry, but uncertainty will always be high 😰, Two times when uncertainty seemed low and confidence was high 🌈, and What keeps me up at night 😵💫
🛠️ Industrial activity ticks lower. Industrial production activity in September fell 0.3% from the prior month. Manufacturing output fell 0.4%. From the Federal Reserve: “A strike at a major producer of civilian aircraft held down total IP growth by an estimated 0.3 percent in September, and the effects of two hurricanes subtracted an estimated 0.3 percent.”
For more on activity stabilizing as inflation cools, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀 and The US economy is now less ‘coiled’ 📈
👶 The economic cycle is young. From San Francisco Fed President Mary Daly: “Compared to recent history, the current expansion is still relatively young.“
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 3.4% rate in Q3:
For more on economic growth, read: Economic growth: Slowdown, recession, or something else? 🇺🇸 and The US economy is now less ‘coiled’ 📈
Putting it all together 🤔
The outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services remains positive as the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by very healthy consumer and business balance sheets. Job creation remains positive. And the Federal Reserve – having resolved the inflation crisis – has shifted its focus toward supporting the labor market.
Though we’re in an odd period in that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
That said, analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
