Headlines Could Use a Warning Label

THERE IS A DIFFERENCE BETWEEN NEWSWORTHY AND INVESTABLE

There is rarely a dull moment in the 24/7 news cycle and the past few weeks have been without exception. From Congressional impeachment inquiries to attacks on one of the world’s largest oil producers; investors have been inundated with heavy headlines lately. From these headlines, the obvious question arises…“What should I do in my portfolio?”

In an unscientific study based on decades of investment experience, we have concluded that most of what appears in the headlines does not require immediate adjustments to long-term investment plans for three reasons:

Little Relevance: Many news stories making headlines such as minor political scandals or organized public demonstrations are ‘non-investable’ in our view, meaning, they have little or no direct investment implications. The ‘yellow vest’ protests in France earlier this year, or those currently happening in Hong Kong, come to mind as two recent examples of headlines that we believe are non-investable.
Too Late: News with clear investment implications like the September 14^th missile attacks on Saudi Arabia tend to impact asset prices immediately. For example, the price of a barrel of West Texas Intermediate (WTI) crude rose 16% on September 16th, the first day the oil markets opened after the attacks. It is also common for the market to over-react to initial headlines and the impact to dissipate over time. Today, the price of WTI has already retraced 87% of its initial September 16th move.
Too Early: Often the hottest news, like trade talks or even the news related to the House’s September 24th impeachment inquiry are too incomplete, too inconclusive, or subject to too many unknown variables to allow an investor to make an informed investment decision. For example, we do not yet know if the impeachment inquiry will lead to an impeachment vote by the House or if the inquiry will help the President by galvanizing his voter-base. How the President will react is also an unknown. Some argue that the White House Administration could counter-strike by fast-tracking voter friendly policies including prescription drug price controls, trade dispute resolutions, and/or cuts to the capital gains tax.

For this reason, we may want to consider putting warning labels on newspapers, radios, televisions, computers, and mobile phones, like those seen on other potentially dangerous products. A suggested warning label might read: DANGER Headlines Can Impair Investment Decisions. Consult Professional Before Portfolio Adjustment.

In the US, the Federal Reserve has lowered rates twice this year and remains vigilant regarding risks to both the US and global economy. The European Central Bank (ECB) recently revived its asset buying (QE) program, and the Bank of Japan is hinting at further accommodation. Most other global central banks are following suit.
Dividend yields in all major markets are well above risk-free bond rates, which we believe suggests that stocks are still reasonably valued.

RECESSION RISK:

Our preferred indicators for US recession – sentiment indicators related to businesses and consumers – still remain in solid territory, in our opinion. We are monitoring this data closely for signs of strain, particularly among consumers, since their confidence can be the most susceptible to negative headlines.
Outside of the US, we are increasingly concerned about regions like Europe and Asia. In particular, manufacturing sentiment in export-oriented regions like Germany and South Korea appear to be in recessionary territory.

RESOLUTION OF TRADE WAR:

Recent body language between the US and China suggests a thawing of tensions. We believe it is too early to get excited, but think it illustrates that both sides are aware of the negative economic and political ramifications of further escalation.
In other news, the US and Japan have recently agreed to a trade deal that cuts tariffs on high profile items like US farm goods and Japanese machine tools – we view this as constructive for both regions.

Bottom Line: We believe that the best investment decisions are made when investors can tune-out the noise and focus on the news that is most likely to carry meaningful investment implications. The final arbiter of news, in our opinion, is the market. Everyday millions of individuals determine what news is important and what is not through the buying and selling of stocks and bonds. James Surowiecki’s seminal book The Wisdom of Crowds (2004) concluded that the collective insights of the many are superior to those of the few. Therefore, while we have theories about what news matters and how it should be interpreted, we must always recognize the market’s message, especially when it conflicts with our own. As we wait for additional clarity and ultimate resolution of many of today’s headlines, we will stay vigilant, adjust our portfolios accordingly and continue to avoid excessive risk taking (See our Weekly View from 8/26/19: This is Why We’ve Been Drinking Water).

Important Disclosure Information

The comments above refer generally to financial markets and not RiverFront portfolios or any related performance. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve positive returns, avoid losses, or experience returns similar to those shown or experienced in the past.

Information or data shown or used in this material is for illustrative purposes only and was received from sources believed to be reliable, but accuracy is not guaranteed.

In a rising interest rate environment, the value of fixed-income securities generally declines.

Investing in foreign companies poses additional risks since political and economic events unique to a country or region may affect those markets and their issuers. In addition to such general international risks, the portfolio may also be exposed to currency fluctuation risks and emerging markets risks as described further below.

Changes in the value of foreign currencies compared to the U.S. dollar may affect (positively or negatively) the value of the portfolio’s investments. Such currency movements may occur separately from, and/or in response to, events that do not otherwise affect the value of the security in the issuer’s home country. Also, the value of the portfolio may be influenced by currency exchange control regulations. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the portfolio.

Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the U.S. and are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S. securities. Also, inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.

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