Headlines and market moves: Is your confidence shaken?
Market movements are a function of the news of the day. The question is: what news is nothing but noise and what news changes the underlying fundamentals? Having the conviction to ride out market cycles and reap the long-term benefits of the equity investments can be difficult because there is usually something in the headlines that shakes our confidence in the markets, which is why it is best to have a financial plan to keep your confidence strong.
We hear about the stock market constantly in the news and on social media, but what happens on a day-to-day basis shouldn’t be of concern to those with a solid financial plan. Long-term planning helps you stay focused on what history has taught us – reacting to short term news is counter-productive to long-term results.
Economic recessions, military conflicts, terrorists attacks or health epidemics all have the ability to stir up click-bait headlines. With all of the unknown factors surrounding these events, investors can find themselves questioning how long the events will last, how they could impact economic fundamentals and, ultimately, how to respond to stock market volatility.
Military conflict
One of the biggest concerns on everyone’s mind in 2024 is conflict in the Middle East. The awful events surrounding the ongoing conflict in Gaza are dominating headlines around the world. The regional players are both powerful and dangerous, and the potential scale of the conflict is unknown. The severity of the situation would trigger fearful reactions from most investors – inspiring thoughts of liquidating equity positions to “prepare for the worst”. However, this has become a shining example of the wisdom in taking a longer-term view.
Regional conflicts erupt with some regularity all over the world, and they typically do not have meaningful impacts on the global economy and markets. The events themselves are horrible for all involved, but the larger economic implications tend to remain limited as long as the conflict remains contained to the region. Hamas attacked Israel on Saturday, October 7, 2023 – and global equity markets were actually higher on the following Monday. The markets encountered some temporary weakness over the next few weeks, but then staged a massive rally through year end, eventually generating a huge positive return for the fourth quarter.
Once the conflict was viewed to not be immediately spilling over outside the region, the economy and markets pushed forward almost uninterrupted
The ongoing conflict in the Ukraine is another similar lesson. Russia invaded the Ukraine on Feb. 24, 2022 – igniting fears of global conflict and supply chain disruptions. Global equity markets were un-perturbed, and actually pushed higher through the end of the first quarter. The ensuing stock market route that occurred throughout the rest of 2022 was in response to high inflation in the US and the Feds initiation of an aggressive rate tightening campaign. The economy and markets have since focused nearly exclusively on inflation and interest rates. Years later, with the Ukraine war still raging and despite casualties near 500,000, the global economy has thrived and stock markets have pushed to new all-time highs.
Terrorism
Terrorism has plagued the globe for many decades. One might think that terrorism would have an impact on financial markets, but it actually does not. History tells this story as well.
Most terrorist events are extremely limited in scope, and typically have very little impact on the markets. Even the worst US terrorist event in history followed a similar pattern. The September 11, 2001 attack on the World Trade Center was likely the most un-expected event in US history (at least since Pearl Harbor). The initial shock caused the equity markets to plummet, but once the initial shock had worn off, the economy and markets began to quickly stabilize. Within 30 days, the US stock markets had re-gained their pre-9/11 values.
Even as the number of terrorist attacks rise, it appears the markets have learned that they don’t typically change the fundamentals of the economy.
We must remain compassionate for all those impacted by these events, but examine the economic and market consequences with calm, clear focus. It is clear that, at least historically, terrorism does not change the fundamentals of the broad economy. It may have a material impact on specific industries, but much of that has proven to be temporary.
Presidential elections
We all know 2024 is going to be a noisy political year. We know elections often create volatility in the financial markets, due to the increased uncertainty as new presidential candidates and agendas are laid out. Individual and corporate tax rates may change, which would have an impact on earnings and available capital. Foreign policy may also change, impacting global trade. Because of this, the markets often take a very choppy ride through the first half of an election year. The last election cycle in 2020 was a classic example of the typical trend. The markets were quite choppy well into the summer months, and only found footing once the primaries were completed and the candidates were known.
After the election, the markets staged a typical “relief rally,” once the uncertainty of the election had passed. By year-end, we had enjoyed double-digit returns from the markets, virtually all of which occurred in the latter stages of the year, as election uncertainty was subsiding.
Additionally, numerous firms have studied the U.S. election cycle for correlations with the economy and markets. Our human nature causes us to believe that certain election outcomes must be good for the markets, and others must be detrimental. Fortunately, there is virtually no data indicating that election outcomes can be tied to any particular economic or market outcome over the subsequent years. Whichever side you are drawn to (red or blue), you can rest assured that you should not make knee-jerk reactions in your investment portfolio based on election results.
Ultimately, no matter who is in the White House (or Congress), we have seen our economy ebb and flow and do not believe that election results should in any way disrupt a strong financial plan.
Geopolitical conflict, terrorism, elections – These events assure that volatility will remain an ever-present factor in the media and markets, yet they should not be catalysts for action. Instead, look ahead at your goals and stay the course. Similarly, look at history and its patterns to calm your concerns.
Turn off the noise
Every day there is a different news story and event that can impact the markets, but it is mostly background noise when compared against a strong financial plan. Having a long-term strategy for your financial goals is the best defense against the daily swings of the markets.
History has proven that the economy and markets will eventually rebound. Usually, staying the course, remaining calm and unplugging are your best strategies to navigate the endless cycle of news. Your financial team is usually the only noise you need to be listening to as you move through your different life phases.
Ready to create your own financial plan? Contact UMB Private Wealth Management to discuss how your goals can become reality.
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