When Absence of Bad News is Good News

The absence of bad news in the past few weeks has put a remarkably positive spin on the markets.

News has many different scenarios, a bit like the game of tic-tac-toe. Good news, bad news or no news are the leading indicators in any scenario but then there is also lack of good news and lack of bad news, that can be interpreted to fit any purpose. In recent weeks, the relative absence of bad news has pushed markets up as investors are starting to apply the “Cry Wolf” principle.

“Good news is good and bad news is bad, but a lack of bad news can be good, at least for investors,” so wrote Vito Racanelli in the current issue of Barron’s.
Since the recent October 3 low, the S&P 500 index has risen 12.6 percent on the back of “a lack of bad news,” according to data from Yahoo! Finance.

Here’s what we could classify as a lack of bad news in the past few weeks:

•    Corporate earnings are coming in strong so far this quarter as 75 percent of the 118 companies that reported earnings have beaten estimates, according to financial data provider FactSet.  Fund manager Louis Navellier further notes that the S&P 500 is up 15% from its October 4 lows.  Analysts are now projecting third-quarter earnings to be 14.7% above last year’s third quarter, compared with analysts’ October 3 estimate of 13.1%.  This likely explains the strong October market rally we are seeing now.

•    Economic news has generally supported the idea that the economy, while soft, is not collapsing. Historically, stock markets have risen rapidly from October through January, and we are entering a seasonally strong time of the year. Furthermore, stock markets tend to rally during election years.

•    European leaders, after months of tough talk, but little action, may finally be on the verge of taking “comprehensive” action to quell (at least temporarily) the sovereign debt crisis, according to Phil Orlando, chief equity market strategist at Federated Investors.  Then again, the financial markets may simply be “tired” of hearing about European sovereign debt issues, bank recapitalizations, or yet another strike in Greece.

Bad news will always be with us, although recently the stock market continues to shrug off bad news and focus instead on some strong, positive third-quarter corporate earnings. These positive earnings reports have a way of reducing fears about double-dip recessions and provide nervous investors with some solid performance.

Whether this “lack of bad news” turns into good news or bad news in the long run, remains an interesting dilemma for financial analysts and an opportunity for those who embrace the attraction of change.