By Jack N., Communications Analyst and Blog Contributor
I spend a fair part of my day perusing financial headlines. It’s part of my job, not part of my investment and trading life. If I spent all day monitoring financial news as an investor, I’d probably be a nervous wreck or broke, or both.
I’d certainly be confused, as I was a couple of weeks ago when I saw two headlines on a financial website. The first was on Yahoo! Finance, “Debt Ceiling Theatrics Could Spark 10% Sell-Off,” while the second on CNBC.com read, “Debt Fight May Not Spill Over Into Markets.”
The headlines suggested opposite market reactions to the debt ceiling debate. Of course, neither is wrong because of the careful use of words like “could” and “may.” If you use those, you have plausible deniability.
As I write this, it appears that the debt ceiling issue will be pushed back a couple of months. But even without that delay, it just doesn’t make sense for me to lose sleep over the debt ceiling given the difficulty in figuring out the impact on the markets.
A few factors related to this issue that could be telling: market volatility, retail sales and consumer sentiment and confidence.
Market Volatility Offers Clues on Market Sentiment
Perhaps the most utilized benchmark to gauge volatility in the stock market is the VIX index. Also known as the fear index, the VIX calculates the implied volatility of S&P 500 index options. When the debt ceiling debate grew intense in August 2011, the VIX index soared. Compared to that period, the VIX remained relatively subdued during the most recent fiscal cliff negotiations last month, and reached five-year lows this month.
Mixed Signals from Consumer Sentiment Index
On Tuesday, the University of Michigan-Thomson Reuters released its second consecutive consumer sentiment survey that indicated serious concern. According to the report, the blame comes largely from insecurity over the fiscal cliff and debt ceiling issues. Consumer sentiment is sometimes seen as a leading economic indicator. If consumers are worried, they might spend less money on discretionary items. But that’s not always the case, because consumers tend to be fickle. Just because they’re worried, doesn’t mean they’re not spending, which leads us to the third factor.
Retail Sales Numbers Can Offer Context
Consumer sentiment is down, but consumer spending is up. U.S. retail sales grew 0.5 percent in December, which was higher than market expectations, according to Bloomberg. While it’s true that retail sales are backward looking, they can provide some insights into the true sentiment of consumers. Even while consumers feel distressed, it hasn’t translated, at least yet, to spending.
The Recap: Stick to the Plan
It’s natural to worry about the future. But it might not make much sense to alter your investing and trading plans over possible events with many possible outcomes. The three factors I’ve outlined here point to prudence, not panic.
What two or three indicators do you consider before you make major portfolio moves or trading decisions?
Also of Interest:
Jack N. is a communications analyst at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.