Optimizer Update | June 2022 - Ignore the Headlines
ITR Economics’ CEO and Chief Economist says, “Ignore the headlines and focus on the data!”
Here are 10 headlines from December 2008 to July 2010 when the market felt just like it does now:
“Fourth-worst drop ever for Dow,” - AZ Central, 12/1/2008
“Stocks fall to lowest level since 1997 as Dow drops below 6800,” -USA Today, 3/2/2009
“George Soros says US banks ‘basically insolvent’,” Reuters, 4/6/2009
“The Global Economic Shock Worse Than Great Depression,” - Huffington Post, 5/8/2009
“Warren Buffett: US Economy in “Shambles” No Signs of Recovery,” – CNBC, 6/24/2009
“Dow Jones Reclaims 10,000,” – CBS, 10/15/2009
“Debt Crisis unsettles European economy,” – The Washington Post, 2/9/2010
“Dow’s Brief Falls of 1000 Points Sets off Anxiety,” The New York Times, 5/6/2010
“Financial Crisis Spreads through Europe,” – NPR 5/27/2010
“Double-Dip feared as the US Economy growth loses pace,” Telegraph, 7/3/2010
On December 1, 2008, the S&P closed at 816.21. It bottomed on March 5, 2009, at a close of 682.55. So yes, if you’d have guessed that the December 1, 2008, headline above had relevance and got out of the market, you would have missed a 16.3% drop in the S&P 500 between those two dates. However, the not-so-rosy headlines continue past the March 5, 2009, bottom. So, if you had only focused on the headlines and stayed out of the market after the December 1, 2008 headline, you’d have missed out on a point to point return of 25.3% from December 1, 2008 to July 2nd, 2010 (this excludes any dividends that would have or could have been reinvested.).
Headlines grab your attention but report the past. They also stoke behavioral biases which cause investors to do the wrong things at the wrong time.
We don’t use mutual funds in our portfolios at Bellwether Wealth. However, from time-to-time mutual fund companies do put out some good pieces of material to help remind us of how the market can behave. Hartford Funds recently published “10 things you should know about Bear Markets”. Here are the 3 bullet points that caught my eye:
Stocks lose 36% on average in a bear market.* By contrast, stocks gain 114% on average during a bull market.
Half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. Another 34% of the market’s best days took place in the first two months of a bull market—before it was clear a bull market had begun.** In other words, the best way to weather a downturn could be to stay invested since it’s difficult to time the market’s recovery.
A bear market doesn’t necessarily indicate an economic recession. There have been 26 bear markets since 1929, but only 15 recessions during that time.*** Bear markets often go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is looming.
*Source: for bear/bull market stats is Ned Davis Research as of 12/15/21 unless otherwise noted.
**Source: Ned Davis Research, 12/21. Time period referenced is 12/16/01–12/15/21.
***Source: National Bureau of Economic Research, 9/20
Everyone knows the markets are volatile. To gauge an investor’s “risk appetite” many investment firms use Risk/Return profiling questionnaires. A common question I have seen over the years is:
If the market falls 20% over a 1-to-2-year period, what would you do?
A) Go to cash
B) Stay the course
C) Invest more money
When the market is going up as it had been until January 2022, the most common answers are B or C. However, when the actual market downturn takes place, many people resort to option A.
Looking all the way back to the start of the Great Depression, the stock market has been in a bear market only about 22% of the time. If we look at the “Cycle of Market Emotions” most of the time we are on the far left of the curve. In fact, 78% of the time the market is not in a bear market. The question about a 20% drop in the market seems irrelevant most of the time.
Our emotions quickly slide down the backside of the curve when markets fall. This is when and why data becomes critically important to the investment decision process. The data I am talking about is not present in the headlines nor is it present in the hour to hour, day to day, week to week or even month to month returns. During these brief periods, the market is reacting to emotions and investors are not thinking strategically.
Brian Beaulieu’s statement of “Ignore the headlines and focus on the data!” is very powerful. Over the years, this sentiment has helped many small businesses and their owners navigate storms in their industries and be prosperous even when the headlines and day to day events were rough.
If investors will apply that same methodology with their portfolios and let the data point to when changes need to be made, their odds of success go dramatically up. Statistically, the odds are in the investor’s favor if they ignore the headlines and either the investor themself or their investment advisor focus on true hard data.
If you’d like to visit more about your own situation, please let me know
Clark S. Bellin CIMA, CPWA