Headlines vs Markets

The media’s job is ultimately to make money by selling advertising. How much advertisers are willing to pay depends on how widely their message will be distributed. That is measured by how well a television network, magazine or newspaper does at maintaining eyes on the screen or sales at the newsstand. Unfortunately, that often means the more negative a story or the more fear a topic instills, the more exposure it’s likely to receive. This is a common complaint, yet we keep watching.

Going back to my blog from last month, an investor’s job is to earn a return on the money they invest in line with the risk taken. Despite some volatility based on truly unforeseen headlines, the market is much less sensitive to the media and much more concerned with what is actually going on in the companies that comprise a given marketplace than the average investor.

In other words, to get a true sense at what’s going on at the markets, look at the markets, not the guy on TV keeping you glued until the next commercial break.

One quarter does not an investment lifetime make, but I’d like to use the fourth quarter of 2012 as a brief case study in lending some credence to the above point.

Going into the fourth quarter of 2012, it was hard to find much optimism. Most Americans had grown tired of an intensely divided election, Super storm Sandy devastated the East coast and the fiscal cliff was looming on the horizon. In fact, I’ve spoken with many people who still believe that 2012 was a bad one for the markets.

Let’s look at some of the crises that many “just knew” would sink the markets to end the year and what wound up occurring in reality . . .

1. Europe’s unemployment rate hits 11.6% signaling more problems for international investors:
   International developed markets were up 5.93% just in the 4th quarter of 2012 (represented by the MSCI World ex USA Index (net dividends))

2. Greece’s debt and budget woes would continue to keep drag down developed market returns:
   Greece, for the second quarter in a row, led developed markets with a return of 17.87% for the fourth quarter (represented by MSCI All County World IMI Index)

3. China’s slowing economy meant that emerging markets were in trouble to end the year:
   Emerging markets stocks were up 5.58% for the 4th quarter of 2012 (represented by the MSCI Emerging Markets Index (net dividends))

4. An Obama re-election spelled doom for the U.S. market:
   The S&P 500 Index finished 2012 up 16% for the year

5. Those fearing the doom and gloom should take refuge in commodities, specifically gold:
   Commodities ended the quarter down -6.33% with Gold down -5.65%. Commodities overall wound up down -1.06% for 2012 (All represented by the Dow Jones-UBS Commodity Index Total Return)

I want to stress again that this is just a one quarter snapshot. It’s not to suggest that anyone should have invested or sold any of their investments based on the above information. It simply illustrates how strongly our emotions can be pulled by headlines when what actually occurs in reality is a much, much different story.

So, what is an investor to do with this information? Not as much as you might think. It’s less about action and more about awareness. Have a plan, stick to it, be aware of the world around you, but careful of the motivations of those telling the story. Try to separate your concern for local, national and world events from your long term investing strategy.