Definition: The “Wall of Worry”, quoting the financial-dictionary.the freedictionary.com:
- Informal; a market uptrend that occurs when there is significant uncertainty about its sustainability. For example, if the market is concerned about potential, new regulations or the possibility of recession but stocks increase anyway, this is called climbing a wall of worry.
As the last of 2012 winds down, two seemingly opposing factors spring to mind:
First, the negative news has been unrelenting. The Eurozone crisis remains resolved. Austerity riots and massive bailouts have become, if not commonplace, at least anticipated disruptions. The Middle East continues to roil because of Egypt’s unrest, Syria’s civil war and Iran’s nuclear ambitions. Territorial issues and sovereignty issues continue with large, potentially adversarial, countries like Russia and China. The intransigence of Washington shows no sign of ending. The US election provided constant opportunities for public rebuke and disapproval of candidates.
Second, the markets continued their climb throughout the 2nd half of the year. The numbers will not final until tonight, but US markets will be up around 14% and international markets will have done even better.
Despite the lack of clear, unadulterated economic growth, the markets climbed because the active sentiment has been based primarily on fear. It is worth noting that the markets do not reflect current reality. Rather, the markets reflect the imperfect aggregation of investors’ presumptions of future reality. The fears that brought down market sentiment are neither irrational, nor without basis. However, what seems to have changed in the past year is that some of the “worst-case” scenarios (a complete and imminent Eurozone collapse, a very hard landing in China, tax rates staying high for middle America even after we fall off the fiscal cliff) have been taken off the table, and investors have become inured to the low level anxiety that has pervaded through the past year.