The External-Event Factor

Some say that markets climb a wall of worry. But that adage leaves a lingering question: Worry about what?

Some external events can send shock waves through the markets, and others don’t seem to even register a reaction. In the past, you could count on rising oil prices to create a significant change in the markets. But it’s the seemingly insignificant events—for instance, yields on bonds inching above 5 percent—that cause the markets to tank now.

Has there has been a change in the factors or events that trigger a change in the market? Pinpointing change is an investor’s greatest challenge—and the source of great rewards.

We sat down to talk about factors that contribute to change with David Joy, chief market strategist and chairman of the Capital Markets Committee for RiverSource Investments, LLC, a division of Minneapolis-based Ameriprise Financial, Inc. Joy has 30 years of experience in the investment-management industry, having also spent time in senior positions at Pioneer Investments, Prudential Investments, Massachusetts Financial Services, and State Street Research.

He also leads the development of the RiverSource’s Capital Markets Outlook, a quarterly investment newsletter. A frequent guest on both CNBC and business and finance cable program Bloomberg TV, Joy is also a senior portfolio manager of the RiverSource Portfolio Builder Series, which includes six strategic asset-allocation funds.

{Q} As this market has hit new highs, have you seen a change in the way it reacts to external news?

{A} I think there has been some evolution of how news gets treated in the very short term. One of the primary reasons for that, I think, is the influence of hedge funds trying to react to news instantaneously. But if you back away from day-to-day moves in the market, I haven’t noticed any major change if you take a look from a several-day or a several-week perspective. At the end of the day, the market is reacting to fundamentals.

{Q} It used to be that the market reacted to key news elements, such as inflation and movements of the Federal Reserve. Have you noticed a shift in how these external factors affect the market?

{A} If you look at the price of oil, I think we’ve gotten somewhat used to the idea that oil prices are higher and will probably stay higher indefinitely because of the global increase in demand coming from places where it never existed before. But we’ve also gotten comfortable with the notion that the economy can function quite nicely even with oil prices this high. I would say, however, that if for whatever reason you were to see the price of oil spike—and I’m going to pick a number here—to $85 [per U.S. barrel], you could also predict a very negative reaction as well. That would imply that we’re in new territory.

{Q} Has there been a change in the way the markets react to inflation?

{A} I think we obsess about inflation more than we used to. We’ve gotten comfortable with the idea that the Federal Reserve has done such a good job of wringing inflation out of the economy that we don’t want to see those gains diminished or lost. So we obsess over a one-tenth or two-tenths move in inflation.

{Q} What other factors cause the markets to react?

{A} Most of the people I talk to are individual investors, and it’s very clear to me that the painful experience of the 2000–2002 time period is very much with them. Those wounds aren’t healed psychologically, and investors are in a heightened state of alert for the inflection point that might signal the end of this bull market. As a result, even if the news isn’t that problematic, I think people tend to get jittery. So I do think that the psychology is a little bit different to that extent.