Volume 90 No. 9 - September 2019
If you watch the news on any given day, the media will explain to you how the financial markets, the world, and our very existence as a free country are teetering on the precipice of sure oblivion, or at least an economic recession.
Because the president said something that shocked some, or a congressman or congresswoman said something that shocked others, or because this or that country has done something else. Beyond the hyperbole, though, what does all this mean to the financial markets?
It’s a Lot Like Reading Tea Leaves An investment’s underlying value is determined by the strength and merits of its issuer, not by what the president said about tariffs and trade wars or what his political opponents or supporters say.
After all, when you buy a share of a company, you are buying a percentage of ownership in that company. The value of that ownership is determined by other investors’ perceptions of the company’s performance and how that relates to how the company will perform in the future
That “will perform in the future” part is where we get into trouble.
Investors — the ones who are moving markets, not the long-term buy-and-hold-type – are a skittish bunch.
They’re often motivated by greed and fear – both their own and the collective type prevalent in the markets.
We saw an example of collective greed raising its head during the dot-com boom of the late 1990s when anything dot-com seemed to be instantly destined to become a highly sought-after investment. While bullish investors scoffed as former Fed Chairman Alan Greenspan decried the era’s “irrational exuberance”, prudent investors refused to jump whole hog into the dot-com frenzy. These prudent investors were later rewarded for their level heads and steady strategies that embraced long-term, well-reasoned approaches. When the market bottomed out on tech stocks in 2001, well diversified, buy-and-hold investors did not experience the extreme down market to the same extent and those who held their securities long enough to see them recover and then surpass prior values.
Many investors who had fallen victim to irrational exuberance later found themselves unable to return to the markets following the post-dotcom bust. In many cases, these buy-high, sell-low investors sat out of the market in their low-risk, low-return investment ‘safe havens’ waiting for the markets to be ‘safe enough’ to reenter. As a result, they made it much harder to rebuild their lost wealth as that bear market turned bullish.
A Culprit Behind the Financial Peaks and Valleys
Last year, in our November newsletter, we examined how trade war concerns, interest rates, midterm elections, and cuts in corporate earnings forecasts were all weighing on investors’ minds as they struggled to determine whether the bull market was raging on, ending, or just hobbling into an uncertain future.
Hindsight is always 20/20, though. The S&P 500 ended August 2018 at the 2900 level. Analysts predicted the certain end of the longest bull market on record. This summer? The S&P has exceeded 3000.
We’re not living in the economic apocalypse presaged by last year’s news media.
Sure, we’re still facing news of shocking things that politicians have said or done, or trade war threats, inverted yield curves, international negative interest rates or worries about the environment that could all impact financial markets – either directly through impacting financial results or indirectly through fears or anxiety about how larger macroeconomic events like climate change or trade relations may impact the markets in the future.
But, it’s not our politicians or some other country’s politicians who are sabotaging the security we feel in our financial markets; it’s us – when we goad on the news media simply by watching them.
The News Media Sell Entertainment First and News Second
We’re years beyond the news media competing on simply getting you the news – good, old-fashioned, “And that’s the way it is,” from Walter Cronkite. These days, with tens – or hundreds? – of news outlets all capable of delivering on-the-spot news (along with anyone who has a Twitter account), news media get your attention by how they deliver the news, not what they deliver.
News stories that drive engagement drive revenue. Shares, comments, likes – these all drive traffic, advertising dollars and success in today’s media world.
Stories that read – this was a little upsetting, but everything’s okay – don’t get this done. Those that drive sensationalism do. These are the stories that line the pockets of the news media, but drive the fear and anxiety that cause volatility in the financial markets.
In a World Where Fear and Anxiety Sell, How Do You Invest?
The surest way to see through the images of the chaos, despair, and uncertainty that the media create is to remember that they are doing this. We can’t get absorbed by the greed that keeps investors buying too much, or the fear that makes them buy or sell rashly. The best response to any news that might impact the markets is always a well through-out, measured approach that looks at the underlying fundamentals of the market and of the company issuing a particular security.
While macroeconomic events like Brexit or trade wars or potential epidemics can impact the market – including the stocks you are buying and holding – a long-term buy-and-hold strategy insulates you, at least partially, from the peaks and valleys that short-term volatility creates in the markets.
By focusing on a company’s fundamentals, you can get a better, more relevant sense of how that company’s stock may perform going forward – more than if you were to focus, for example, on immigration raids or Chinese economic growth, or whether Britain remains part of the EU. For many companies in the US, these global concerns are faint pinpricks of light in their universe, but hardly the shining suns that the media would have you believe that they are.
Warren Buffet, an incredibly talented and successful investor, once stated, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” We agree, a well-reasoned investment portfolios built for all markets has and most likely will continue to provide better long-term results. That means not jumping to rash conclusions each time you turn on the 24-hour news cycle. It also means monitoring your investments periodically to make sure they still make sense to you and your financial objectives. Here, at Investment Counsel, we stand ready to help you do that. We are aware the stock market has had an extended run, that domestic and international issues are challenging, and that we are always one day closer to the next recession or bear market. However, the please be mindful the news media’s primary objective is to have you view the next commercial, selling soap or some other item, certainly not your investment success. As always, if you have questions about how world, national, or even regional events are impacting the investments in your portfolio, let us know and we’ll be happy to review this with you.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.