Stock Market Narratives Are Probably Wrong

February 22nd, 2017 by 

Much has been written about the recent run-up in stock market valuations so I do not want to rehash many of the arguments about what is driving the bull market in US stocks besides listing some of the hypotheses:

  • Higher inflation expectations
  • Expectation of deregulation
  • Expectation of faster interest rate increases
  • Continued consumer confidence
  • Expectation of US corporate tax reform

A few other ideas have been floated around but the majority of the arguments lie around news that might be good for domestic businesses. Since the timing of the most recent appreciation starts right at the US election, many are pointing to US-centric reasons for the movements. In reality, the stock market is much more complex and less available for simple explanations.

Why Are International Equities Also Appreciating?

With the global reach of modern corporations, international borders may not properly define a company's "country" since they may have business dealings around the world. Even with that, companies outside of the USA deal with different problems and are exposed to different risks than American companies. Below I have listed the return of VEU (Vanguard's International Stock) vs. SPY (S&P 500 Index).

Equities worldwide have seen an increase since November Election


11/8/2016 – 2/21/2017

Price Return+10.44%+5.58%
Dividend Return+0.59%+0.85%
Total Return+11.09%+6.48%
USD Return (based on USDU)


Since the election, American stocks have outperformed international stocks by ~4.5%, which barely outpaces the increase in the US dollar. In other words, there has been very little difference in the performance of US stocks compared to international stocks when controlling for the increase in the dollar.

A Case for Avoiding Narratives

The problem with narratives is they can often cloud your judgement. Reacting to a false positive of a news story may make you more likely to make sub-optimal news. For example, if you read that Congress is cancelling a committee on tax reform, does that mean you should sell all your stocks to deleverage? Generally, emotional responses based on headlines and narratives can only distract you from proper long-term valuation and investment.

The world is a complex and chaotic place. It may be more comforting to many of us to look at simple heuristics and explanations and gain solace in understanding the gyrations of the market. More likely than not, though, any explanation that oversimplifies the mass movement of global capital markets will be incorrect simply because there is so much noise and potential for false positives. Do yourself a favor: don't read daily financial headlines.


Cameron Daniels


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