With the passage (and signing) of the recent $1 trillion infrastructure bill, there’s been a lot of conversation around how it could affect the markets. But the fact of the matter is that trading on the news (infrastructure this month, who knows what next month) doesn’t usually pan out the way investors expect.
On its face, it seems relatively straightforward: Congress is spending a fortune on a wide variety of infrastructure projects. They’re not picking up shovels and resurfacing roads themselves, that money has to end up in the hands of a company that does the actual work.
By extension, shouldn’t stock in the companies doing the work rally on all that infrastructure money?
One would expect that to be the case, but in reality very few big winners were ever launched because of news items coming from Congress.
And the reasons why aren’t that surprising.
3 Reasons to Avoid Trading the News
First, when it comes to spending bills, there’s a ton of uncertainties: When will the money be spent? Who gets the contracts? Are there any strings attached to the spending that might dampen profits?
Second, the world isn’t static—maybe the infrastructure bill does help many firms, but maybe that happens at the same time the economy slows down, which nets out any benefit. (I’m not predicting that, FYI, just using it as an example.)
And third, you have to ask, on the margin, how much any extra business will help firm XYZ—maybe a big outfit sees business increase 5% or 10% for a few quarters, which is nice in the real world, but might not be enough to entice big investors to really build big positions.
That last point is key: I will never, ever claim to have the Bible when it comes to growth investing, but in our numerous studies of big stock market winners, there was almost always something durable and unique with a firm that produced rapid and reliable growth for many years. There’s nothing wrong with rolling the dice on a small position or two and dabbling in news-based trading, but usually it’s best to just stick with the stock selection system and look for the best merchandise out there—regardless of what Congress does or doesn’t do.
As for the current market environment, I have two thoughts, one short-term, one intermediate-term.
Short-Term Outlook
I’m starting to see a few signs of giddiness and “too good to be true” action, which usually coincides with some sort of hiccup.
For instance, here are the assets in all bullish Rydex funds—it’s gone straight up with the market and is now at multi-month highs. Moreover, my partner-in-crime Jacob Mintz has been pointing out that the VIX volatility index has been rising of late even as the market has, too; historically, that signals smart money is starting to hedge, which often precedes some weakness.
I wouldn’t be surprised if the weakness we saw early this month leads to some sort of short, sharp pullback that shakes the tree. Or maybe we see a bout of rotation out of some hot areas and into others. Either way, the risk of some discomfort seems to be rising.
Intermediate-Term Outlook
Bigger picture, though, I’m very optimistic, and there’s one main reason for that: It’s been a long time since I’ve seen so many breakouts from big, multi-month launching pads—and from a variety of industries, too. Shown below is a broad selection of charts that have recently gotten loose and/or gapped up hugely on earnings:
Listen, in the market, there is never any certainty, so it’s possible this massive wave of earnings gaps and breakouts is some sort of spike top. But I doubt it—that might be the case if all this action was coming after a few months of positive action, but this time around, most stocks and sectors have chopped around for the five to eight months, making the recent moonshots look like blastoffs, not blowoffs.
It’s still important to pick your stocks and buy points carefully, but it’s also important to listen to the evidence—which has grown increasingly bullish.
Do you participate in news-based trading? How often do you pick your stocks based on a major news event?