Stock Market News Versus Fundamentals
What do you think drives the stock market? Is it news headlines reporting on a rumor or a tweet causing stock market jumps and dips? Or is the market-driven more by its fundamentals (the underlying data behind the price of stocks)? I don’t know that there is one correct answer to this question. In fact, the answer probably depends on your time horizon.
Stock Market Influenced by News
There has been plenty said about the impact President Trump’s early morning tweets may have on that day’s stock market gains or losses. It’s impossible to precisely determine the exact amount of gain or loss to attribute to a tweet. Still, it’s no coincidence that in August 2019, as rhetoric became more firm from President Trump towards China and the Federal Reserve, we saw an increase in stock market volatility. The chart below represents Q3 performance for the S&P 500, and also shows the spike in volatility we observed at the same time.
There has been no shortage of news headlines over the past decade. There was the BP oil spill in the spring of 2010. That same year the European sovereign debt crisis kicked into high gear. In the late summer of 2011, for the first time, Standard & Poor’s downgraded US federal debt below a AAA rating as a result of Congress failing to raise the debt ceiling. In 2015, the Chinese stock market crashed by more than 40%. Greece defaulted on a €1.5 billion payment to the IMF. While this was going on, there was a global panic about the Ebola virus outbreak. In 2017 it seemed every month North Korea was launching another volley of missiles into the Sea of Japan. Today, we’re gearing up for another ugly election cycle.
Meanwhile, since March 6, 2009, the S&P 500 is up more than 470% (including dividends). We’ve not had a 20% bear market along the way. In fact, the S&P 500 Total Return index has only had a single negative calendar year return since 2009, which happened last year in 2018.
Stock Market is Not the Economy
The stock market is not the same thing as the economy. These two things are separate but tethered together. In April this year, Josh Brown wrote an article published on CNBC in which he referred to an analogy created by Ralph Wanger, a brilliant fund manager. Wanger once said:
“There’s an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch.”
“But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the dog watchers, big and small, seem to have their eye on the dog, and not the owner.”
Will News Impacting the Stock Market Have a Long-Term Impact?
It’s undeniable the news headlines each day impact stock market performance, but perhaps this is a short-term phenomenon. Jack Bogle, the founder of the Vanguard Group, believes fundamentals are what drives the long-term gains in the stock market. He describes the fundamental return as the dividend yield plus the earnings growth of companies. He told Christine Benz in an interview for Morningstar last year, “The only thing that gets in the way in the short term is a speculative return; are people going to pay more for stocks?” What he is saying is that the majority of the stock market’s performance is driven by the market’s dividend yield combined with the market’s earnings growth. A small percentage of long-term return is driven by speculation (which is in part driven by news headlines).
In other words, tuning out the noise of the day would not only lead to better mental health, but it’s also likely to have a positive impact on your long-term financial health as well.
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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.