Do markets care about uncertainty?

It’s an idea that has, in general, caused some investors to hold cash in favour of stocks with the hopes that they’ll be able to buy back in once the market falls. It’s also a line that finance professionals like to use to help make sense of what might come next. If stocks perform well in a seemingly out-of-control world, then what reason would they have to fall? Eventually, they say, the bad news will catch up.

But, what if markets have stopped caring about global events? Investors seem to be spook-proof and that threats of wars, tariffs and collusion are having no significant impact on stocks.

Consider this: On June 6, the U.S. and China slapped tariffs on $34-billion of each other’s goods, while President Donald Trump said he’s considering putting tariffs on $200 million more worth of items. While $34 billion is nothing for these two economic powerhouses, you’d think that a trade war—and this is one—between the world’s largest economies would send markets spiraling. What could be more uncertain than a never-before-seen economic battle like this?

Yet, markets have barely budged. Since the tariffs were announced, the S&P 500 has risen by 1.34%. The S&P/TSX Composite Index is up nearly 3% since June 1, when the U.S. introduced tariffs on Canadian steel and aluminum imports. Even an eyebrow raising meeting between Trump and Russian President Vladimir Putin, the trashing of NATO allies and Brexit-bashing Theresa May hasn’t impact stocks, with U.S. and Canadian markets up nearly 1% over the last week.

Market volatility has been relatively low, too. The CBOE Volatility Index, which measures the market’s expectation of volatility, hit a record low in 2017, and while it did spike in February, when bond prices climbed above 3%, it’s fallen by 67% since that February 5 spike.

So, what gives? Sam Stovall, a market historian and chief investment strategist at CFRA Research, admits that he can’t explain what’s going on. It could be that investors still don’t believe Trump will jeopardize the U.S. economy just to appeal to his base, but we’re already seeing the impact of tariffs. Washing machine maker Whirlpool Corp. revealed in its Q1 results that its net income was down by $64 million—it’s share price is down 24% year-to-date—driven in large part by steel and aluminum tariffs, which drove its input costs up.

Stovall, who can cite nearly every market dip in the S&P 500’s history, and still believes that uncertainty does have an impact on markets says, “I’m pretty much at a loss at this point.” One plausible explanation is that we’re becoming desensitized to what would normally would be shocking events—similar to what’s happening to all those who watch CNN on a regular basis. We’re so overwhelmed by the sheer volume of news that investors don’t know how to react. “Investors can become sanitized to all the volatility or, in Trump’s case, the tweets,” he says.

Investors may also be more focused on fundamentals than global issues, even though tariffs could impact fundamentals. According to S&P Capital IQ, Q2 corporate earnings are, as of June 18, up 20% compared to last year. The U.S. economy continues to climb, too, with some experts estimating GDP gains of between 3% and 4% in the second quarter. Up here, the Bank of Canada is estimating decent 2.8% GDP growth in Q2.

While smaller dips of 1% and 2% have occurred after a Trump tweet or comment, you’d think that based on what’s happening the declines would be more severe. Michal Dzielinski, an assistant professor at the Stockholm Business School who studies market ups and downs, thinks that these dips are a result of uncertainty, but admits that they’re not as deep as one might expect. He doesn’t have a good explanation as to why markets aren’t falling further, other than to ask, “perhaps 1% and 2% today is what 5% was 10 years ago?”

If people are more desensitized to Trump and trade wars, then it may take more Whirlpool-like results to scare people off stocks. Over time, the impact of tariffs will become clearer, says Rich Guerrini, president and CEO of PNC Investments, a Pittsburgh-based fund company with $50 billion in assets under management. He’s waiting to see how earnings will react, before he makes any big moves. “It’s too early to tell,” he says. “But I want to look at the individual companies that are affected by trade and see what the true impact is on corporate earnings.”

While it’s hard to see what might move equities these days, the real danger is that something occurs that gives the market a massive jolt. Maybe it’s U.S. tariffs on Canadian autos, or China retaliating by selling down the $1 trillion in U.S. treasuries it holds (an unlikely scenario as that would hurt China, too, but it is a possibility) or some other difficult-to-comprehend event, but at some point investors may get nervous enough that they decide to get out.

Of course, people shouldn’t sell out of equities—that’s never a wise idea—but the current environment puts investors in a bind that’s almost impossible to get out of. If markets aren’t reacting to what’s happening in the world, then it’s plausible to think that they’ll just keep going up. If earnings take a nose dive, or if investors suddenly say they’ve had enough, then they could drop—and fast.

Stovall says to stay the course—the market isn’t giving him any clues that it may be heading downward, he says—while Guerrini has pared down his firm’s allocation to stocks, though, he says, it’s because we’re late in the market cycle and not due to world events. Ultimately, investors will just have to take what comes at them, unless they have a particular view and may be either willing to stay on the sidelines for what could be a long time or be OK with losing a lot when the market falls. The stock market is difficult to predict in normal times, but if investors no longer care about uncertainty, then it’s almost impossible to know what move to make next.

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