I was fortunate enough to have be able to play football for a number of years. I still enjoy watching and commenting on games – especially how the visual acuity of the referees at any level has not measurably improved over the years…
Coach Lombardi made a lasting impression on all of us who were playing at the time – even if we weren’t actually on one of his teams. One of the main reasons for his success was that his focus was always on the fundamentals of the game. It’s that concept of focusing on fundamentals – though in the investing context – that I want to use as the framework for this note.
This past week, we got gave us one of the best examples of how headlines affect short-term markets in a long time.
On one hand, on Tuesday, US markets dropped by 1%. (1) We got a new Fed Chair nominee and the political situation in DC remained a mess for the sixth business day. Then, on Thursday, we had the second-best single session gain of the whole year. Each of the three major market indicators rose over 2%. (2) Why? Well, the politicians indicated that they would actually talk with one another. We reached the point that our politicians decided against committing economic suicide. This is then celebrated as good news.
Interestingly, the best one day rally this year occurred nine months ago. It was also due to a deal to avert another self-induced political crisis -the Fiscal Cliff. (Ever heard anyone talk about that “crisis” since?) The Dow closed Thursday back to within just 3 points of where we were when this whole drama started on the 1st of the month. Friday’s close put us ahead of that level. (3)
Since this political shutdown farce began on the 1st of October, many people I talk with have expressed their concern about how it all would be affecting their investments. Should they be worried? Should they sell?
It’s my belief that there is always excessive emphasis on short term noise…focusing on the most recent data point, instead of the underlying trend. Sound bites seem to matter much more than the big picture. For instance, here are two headlines from the past week that really, in my opinion, demonstrate why I believe this.
From Business Insider on the 7th.“ Here’s the Horrific Stock Market Crash We Could Witness If The US Government Misses An Interest Payment.” And then, CNBC had this on the 10th. “7 debt-default doomsday scenarios.” Well, those just make you feel all warm and toasty, don’t they?
My point is that mainstream financial journalism on all levels seems to try its very best every day to talk the market down and, if that doesn’t work, to scare you out of it. To them, crises are like a bus: if you miss one, there’ll be another coming along in fifteen minutes. Headlines like these succeed in scaring many investors.
I suggest that investors turn down the noise and focus on the signals that actually do matter. For instance, use these criteria to help in your decision-making:
Valuation: How are stocks valued right now? Are they relatively cheap or expensive? (Keep in mind that cheap stocks can always get cheaper and the expensive stocks can also get more so.
Trend: What’s the overall economy doing? Is it expanding or contracting? How’s the market direction – rising, falling or sideways?
Inflation: Are prices of goods rising, falling or stable?
Earnings: Are companies able to grow their top and bottom lines? This, to me, is the most important one. If earnings are rising, their shares will eventually grow.
Worries over congressional carrying on may rock markets in the short term, but over time, fundamentals rule, no matter who says what in DC.
With apologies to The Coach, I believe the market knows these kinds of political situations usually aren’t resolved until sudden death overtime…something we saw a bit of this last week. Having said that, until the proverbial deal is actually done, look for more market moves driven by headlines.
What’s interesting is that the stock and bond markets are actually quite calm despite the chaos in Washington. I think the choice of defaulting is so beyond stupid that “Wall Street” can’t take it seriously. I think that’s the right conclusion.
Selling stocks into any short-term political uncertainty usually winds up being costly for investors. It’s been especially so this year as stocks have rebounded from the dips caused by the uncertainty and the bull market has continued. I do not believe this is a time to be randomly selling stocks. Instead, consider adding quality issues to your allocations.
- Zacks.com, 8 Oct 2013
- CNBC, 10 Oct 2013
- CNBC, 11 Oct 2013
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Michael J. Maehl, CWM®
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