17 Mar Market and Economic Update – March 2017
We believe the current political situation is providing a valuable lesson to investors. That lesson can be summarized as: “there is no place for emotions and ideologies in successful investing.” Since the election in November, it seems the media and most market participants have believed that the current political environment would cause markets to crash. This was the same thinking when Great Britain voted to leave the European Union last June. Markets in both countries are up since those events shocked the world. How could this be? Perhaps this summary will shed light on the confusion:
“In fact, in a 1988 study conducted by Cutler, Poterba, and Summers entitled “What Moves Stock Prices,” they reviewed stock market price action after major economic or other type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.
However, the study concluded that “[m]acroeconomic news bearing on fundamental values explains only about one fifth of the movement in stock market prices.” In fact, they even noted that “many of the largest market movements in recent years have occurred on days when there were no major news events.” They also concluded that “[t]here is surprisingly small effect [from] big news [of] political developments . . . and international events.”
In 2008, another study was conducted, in which they reviewed more than 90,000 news items relevant to hundreds of stocks over a two-year period. They concluded that large movements in the stocks were NOT linked to any news items:
“Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps.”- Seeking Alpha, Avi Gilburt, Sentiment Speaks, March 2, 2017
Bottom line, the news does not have a huge impact on market moves. This idea flies in the face of many market participants and is why it is crucial to avoid knee jerk reactions to events you disagree with or may think are negative for the market. Because at the end of the day, you can’t determine which way the market will move based on the news.
We have learned this lesson overtime and do our best to implement this knowledge on a daily basis. We are focused on following the underlying trends in the economy and the markets. We are focused on whether conditions are improving or deteriorating. We are focused on how much risk we should be taking. We are focused on making money when the conditions are supportive and protecting our clients’ assets when the conditions are not conducive. This is easier said than done, however it is our base philosophy.
Currently, we continue to believe we are in a positive environment for stocks and risk assets. There have been no changes in the underlying trends to make us think otherwise. It is a bit concerning that stock markets have run this high without a pullback so some caution is warranted in the near term, although not enough to make us think we are entering a period of steep declines.
Small Businesses are feeling optimistic about the economy
Jobless claims are at multi decade lows
Corporate earnings estimates are better than average
U.S. = S&P 500 Index; Japan = Nikkei 225 Index; Europe = Euro STOXX 600 Index
Source: Charles Schwab, Factset data as of 2/28/2017.
We will continue to communicate our thoughts on the markets along with explanations on why we are making certain decisions.
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