The weekend’s terror warnings raise certainly rattled the futures markets. Traders should be asking themselves: How much of a terror premium has already been discounted by the markets?
This was the first increase in the terror threat assessment to Code Orange since December 2003, when the warning level was similarly moved to Orange from Yellow (It was dropped 3 weeks later back to Yellow on January 9, 2004).
Over the past few months, there have been numerous “indefinite” warnings. While some observers have noted the politically suspicious timing of these rather vague admonitions, there was no such chatter this time around. The DHS has provided specific and credible warnings based upon a high value capture about a potential attack.
The market’s response today confirms last week’s action: Despite rising oil prices, terrorist bombings, soft GDP number, and a Democratic convention that was generally perceived as a success, the markets managed to make progress, for the first week in seven.
This confirms our prior observations: Investors should be much less concerned with headline news, and far more focused upon the long-term health of the economic expansion. We find an emphasis on trend, sentiment, valuation and monetary policy allows an X-Ray of the market’s health. Indeed, day-to-day announcements are often a distraction as to what is lurking beneath the latest headlines. That is the bigger picture you want to focus on.
So what does that data reveal? While the Trend has been negative since June 30th, it has since reversed and is making a counter move. Although Interest rates are likely to rise over the next few years, Monetary policy – both in terms of rates and Money Supply – remains incredibly accommodative. Sentiment has reached a series of extremes; The most recent investor attitude can best be described as indifferent. And Valuation, at least according to the so-called Fed Model, remains relatively attractive.
All this suggests that the potential reversal we mentioned on July 22, 2004 is starting to occur. That it is does despite a series of truly awful headlines just goes to prove the point: The Markets progress according to their own internal rhythm, and ignores most of what seems to occupy our daily lives.
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