Benjamin Graham, the father of value investing, used to say that in the short run, the stock market is like a voting machine, tallying up which firms (stocks) are popular and unpopular. But in the long run, the stock market is like a weighing machine--assessing the substance of a company. The past twelve months (ending on 8/7/19) is a microcosm of this so very true infamous quote. During this period, the stock market, (as defined by the S&P 500 index) has seen its share of exaggerated ups & downs, but where has it landed after twelve months… basically Even Steven.
During the past year, there were a number of down (and corresponding up) moves for the stock market driven by actual news events, global economic concerns, or tweets from our Commander In Chief (oh, how the world has changed). Look no further than this twelve-month chart of the S&P 500 Index (S&P) performance for proof of the dramatic shifts in what many call “market sentiment.” I count no less than seven some- what eye-popping directional moves for the S&P.
Now, imagine you are a short-term stock market participant (notice I did not use the term investor) and you made an investment decision based on each of these 5% moves in the S&P?!?! This would be your activity for this period:
· Beginning of October: The wheels start to come off the S&P when our Commander begins to implement the strategies of his best seller, Art of the Deal, and decides to play hardball with China by announcing tariffs. So, you sell all the way into the end of the month;
· Beginning of November: Look at that, our Commander, taps down the tariff rhetoric, the S&P heads higher, you come back in;
· End of November: Uh oh… just kidding, Commander is serious about tariffs, down goes the S&P, you sell again… only to buy again when things appear better;
· December: This time, it’s not our Commander, it’s our Federal Reserve that upsets the apple cart by raising the federal funds rate one last time (even though the Commander and many pundits believe the economy is slowing)… This drives you to sell so you can enjoy your holiday dinner in peace;
· January – May: The 2018, 4th quarter concerns were apparently just a cruel joke… all is well (we are going to get a trade deal with China, the Federal Reserve is now considering lowering the federal funds rate, etc.)… so you get back into the market. (By the way, the typical response to the Federal Reserve raising and lowering rates is so short-sighted, it’s somewhat comical. If the Federal Reserve raises rates it means the economy is strong, which is good over the long-term. But if you only focus on the short term, this is considered bad since it’s going to cost more money to borrow... and vice versa)… I digress; and
· May – August: The market drops then rises, then drops again to where we are today… Even Steven. (If I traded on all this short-term news clips, I would have waived the white flag. It was exhausting just typing this, let alone if I actually acted on all of this).
There were other newsworthy events throughout the year but yes, much of the volatility was a result of the man at 1600 Pennsylvania, the Federal Reserve, and how people perceived these actions/words/threats would impact the great companies that make up the stock market. Well, as the chart depicts, short-term volatility was present but over the longer term (12 months in this case), the underlying value of these companies carried more weight than some threatening tweets and returned the S&P back to the level it stood at one year ago.
So, to answer the question in the title of this commentary… Not really. As investors (i.e., people with a long-term interest in the stock market) you always want to pay attention to the news/events that may impact your investments but do always remember you are (hopefully) investing in great companies that over the long-term will be valued appropriately. (Even if tariffs remained for the long-term, companies will make the necessary adjustments, and ultimately create value.) In this relatively short period of time, we saw value rise to the top. Look no further than the rise from the December low for proof of this.
Back to monitoring Twitter… have a wonderful rest of the summer!