Last week the world had its fair share of headline-grabbing events. Stocks, measured by the S&P 500 index, were down over 2.5%. Time to lighten up on your equity holdings?
It’s a sad truth, but very bad things are going to continue to happen in the world. Every day, pundits will tell us there is a new threat to the global economy. They will tell us how this time it’s different in the Middle East, this time that dictator is a major threat to our livelihood and this time that virus is surely going to wipe out the population. Fear drives viewership and mouse clicks.
Sorry, pundits, but the truth is that this time is almost 100% certainly just like last time: a footnote in history. As investors and allocators of savings, we must tune out the short term noise and always focus on the bigger picture. Does a renewed conflict in Gaza materially affect the earnings outlook for US stocks? Does (unfortunately) another terrorist attack suddenly crater the value investors are willing to pay for those earnings? Probably not.
The human suffering and tragic story lines of all geopolitical events tend to resonate with certain investors who will overreact to the images they see. In turn, financial assets will fluctuate with this emotion. It is our job as investors and savers to look beyond this day-to-day drama.
Let’s look at stocks specifically. If someone wants to know why certain stocks went down on a given day, usually the true answer is, “well, some people wanted to buy and some people wanted to sell, it just turns out the price they settled on was lower today than the day before.” We rarely get that answer because it’s much sexier to attach a headline to it. The market is open five days a week. Stocks have to go somewhere and so sometimes they go up and sometimes they go down. Only when we start to attach themes will emotional overreactions begin to prevail.
At some point, a minor headline will turn into a major one and it will affect financial assets in a meaningful way. Investors must be ready to interpret that change and act accordingly. Until then, let’s stick to the plan.