Insights and Actions – "The News Is: The News Does Not Matter"
July 17, 2017
General Comments
The 24-hour news cycle requires a constant stream of headlines, and the more profound the headlines, the greater the potential audience. That is why the news often leads with “a baby caught in a well” or something similar.
Stock market pundits like to have a reason why the market went up or sold off. Sometimes those reasons seem very credible and compelling. The reality is that we often do not know why the market responded the way it did. Why does the market sell off on one employment report, but not on a similar report? The answer is that most of the news does not really matter to the market. Does the news of Donald Trump Jr.’s emails really alter the picture for corporate profits? Does it suggest a recession is closer at hand? We think not.
We are guilty of having one of those 24-hour news channels on in our offices around the clock. We see the talking heads discuss the ramifications of the Fed’s latest pronouncement, the latest on the potential that the GOP conspired with the Russians to alter the outcome of the election, the likely outcome of the upcoming vote on the repeal and replacement of the Affordable Care Act (Obamacare), and everything in between. Sometimes it is easy to get drawn in to a compelling story, told well, with important implications.
The market has an uncanny ability to look through the noise that is the 24-hour news cycle. Sometimes the markets get drawn in, and prices are altered for a short period of time. Often by the end of the day, or within a very short period of time the market has returned to its senses. Following the assassination of JFK on November 22, 1963, the market was higher by the end of the month. Even after 9-11, and despite the disruption of the market being closed for a week, the market was higher by the end of the year. News, no matter how important it seems at the time, often has very little long-term impact on stock prices.
That is why we rely on data points not on talking heads. Are credit problems bubbling up? Are bank lending standards tighter? Are Purchasing Manager reports turning down? Are Fed reports negative? Are employment trends changing? Are Leading Economic Indicators advancing or declining? What is happening with commodity prices? With interest rates? With the shape of the yield curve? With the dollar? Most of the indicators we watch are behaving well, and we will continue to rely on them to tell us when risks are rising. Remember that CNN viewership was never higher than it was in the week following 9-11. The news is no longer a public service, but instead is an entertaining and very profitable method for delivering information (useful or not). For us, the data points are the only part of the news cycle that truly matters to the market.
Data Points and Global Economic Indicators
As we mentioned above, many of the data points we watch do not suggest concern. Instead, we see global growth improving. The big U.S. banks recently passed the latest stress test, and credit problems seem quite contained. Commodity prices are not soaring, but they have certainly stopped going down. The spread between short-term and longer-term interest rates has declined somewhat, but they remain at levels that do not indicate a recession is on the horizon any time soon.
It is true that the economic data coming out of China has weakened somewhat. The potential for growth to accelerate well above 2-2 ½% seems unlikely, but so too do the prospects for growth to slow much below 2%. Employment trends are good, although we recognize that many people have simply stopped looking for work. We do acknowledge that much of that is demographic, but still the trends seem reasonably positive. It is hard for us to be very negative in the face of data points that remain quite supportive.
Asset Allocation
We believe it is prudent to hold less cash than usual. Our targeted cash position for clients in our Tactical Equity Income and Tactical Equity Opportunities strategies is roughly 8%. This is the same as it was as of this time last month.
Sector Allocation
We have continued to reduce our exposure to the defensive economic sectors, and have increased exposure to those areas that will continue to benefit from growth. We have reduced our exposure to the very defensive consumer staples sector, and we have continued to add modestly to our industrial exposure. Our largest exposure continues to be in the technology and industrial groups where we find the potential for above-average growth.
Conclusion
We will continue to ignore the news, and focus on the data. The news may be negative by design so as to increase ratings, but the data points do not have an ulterior motive. It is summer, trading can be thin, and markets can be whipsawed. Turn off the TV and enjoy your vacation. We are here to worry so that you can get away. When the data changes, we will adjust. Until then, ignore the news.