Making short-term predictions about the movement of asset prices and other economic data is a perilous undertaking. You not only have to get the event itself right (will the Fed raise rates, will employment numbers be higher or lower than expectation, will the Presidential candidate who is lagging in all major polls pull out the ultimate upset…) you also have to accurately assess a market reaction that is often surprisingly at odds with what ‘logic’ would indicate the outcome should be. Some recent cases in point:
Interest Rates: If someone had told you back in early December, 2015 that the Fed would begin (at its mid-December meeting) a series of rate hikes culminating in more than doubling of the Fed Funds rate within short 18 months, you would have predicted that the 10 year treasury rate (an interest rate many smart bond investors were sure was headed to 4% or more as the Fed started raising its rate) would…decline? Here we are, several Fed hikes later, and major market driven interest rates are down, not up. A seemingly ‘safe’ bet would have been to short treasuries (which go down as interest rates go up) – and if you had a crystal ball showing the Fed hikes to come – you would have bet big. And lost. Even what seem to be the most obvious outcomes like the 10 year treasury rate rising concurrent with multiple Fed hikes can turn out not to be the case.
The Twitter Trade: If a bird whispered in your ear a couple years ago that Twitter would be in the news constantly, that our President would be single-handedly giving the company tens of millions of dollars of free advertising, a logical conclusion would have been that this daily high-profile publicity would translate into more users and profits. Yet the stock has gotten crushed since Trump announced his Presidency (and amped up his Twitter presence), declining over 50%. Big headlines don’t always translate to the results you would expect. Stay focused on the fundamentals and look past the buzz.
The Big One – The US Stock Market. Ok, here is the real shocker... Send yourself back in time to the night of the election. Polls were starting to close, what weeks before looked like a blowout for Hillary was shaping up to be a tight race. The prospect of Donald Trump being our next President was starting to form as a real possibility. And stock market futures were plunging. At their lows, futures were predicting (as folks like Mark Cuban had placed big bets on would occur if the highly unlikely event of Trump winning were to occur) a blood bath. On the heels of a multi-decade record of 9 straight down days for US stocks leading into the election, futures indicated another approximately 875 point loss for the DOW before circuit breakers preventing further carnage kicked in. Imagine if at that moment someone from the future started reading you headlines from 2017. Trump Accuses Obama of Wiretapping Him. Government Probes Russian Hacking Into US Elections. Trump Agenda Grinds To a Halt as Investigations Pick Up Steam. Trump To Be Impeached? With this information in hand, and with real-time markets in a free fall, you would have bet that within a few short months the DOW would be up nearly 4,000 points from its overnight lows?!?
It’s easy to read scary headlines - it’s easy to react to news that is in your face 24/7. It is difficult to set forth a strategy - it takes confidence to take no action - it is challenging to stick to a plan with fortitude and discipline, but necessary for long-term investment success. The next time you read a headline and are ‘sure’ you know its impact on stocks, think about recent events, eat a little humble pie, and refocus your energy on what we can control and what has worked over long periods of time: allocating assets consistent with our holding period (cash / equivalents for short term, stocks for long term, bonds and other assets for in between), staying well diversified, not pretending we can time the market, etc. By avoiding big mistakes within your control – and not attempting to divine how millions of emotionally-driven investors will respond to headlines – you will dramatically increase the chances of success, and free up lots of time and stress along the way!