July 19, 2016 | by James Behr Jr & Christopher Paleologus
“U.S. stocks hammered as Brexit shock rocks markets,” “Worst day in 10 months as Wall Street reacts to Brexit,” and “Brexit Panic – Should You Sell Your Stocks?” are just a few of the headlines following Britain’s decision to leave the European Union on June 24th, 2016, just a little over 3 weeks ago. Today you’ll see headlines announcing “Dow, S&P 500 Soar to All-Time Highs,” and “All-time high is mother of all buy signals.” Over the top headlines in the media are one of the biggest risks that investors face yet many people fail to realize it. With the large number of media outlets today headline risk is more prevalent than ever and not being aware of it may have disastrous results.
It happens all the time; the media as a whole sensationalizes stories to draw attention. Events, even seemingly insignificant ones that often have no meaningful impact over the longer term, tend to be misrepresented and exaggerated as they occur. This in turn helps these media outlets to achieve their main goal which is attracting more viewers. However one of the worst decisions any long term investor can make is to act on them.
Three weeks ago, the “Brexit” headlines listed above ran across many investors’ newsfeeds, most likely causing a twinge of fear as thoughts about their portfolios hit them. In the two days following the “Brexit” the S&P 500 fell 5.34%. Many people sold the first day as the sensationalism picked up and fears of global crisis spread. They were right, at least for one day. Over the weekend, uncertainty about the U.K. economy, the pound, and the possibility of other European Union countries deciding to leave weighed heavily and pointed to a sharp move down on Monday. Monday, June 27, the Standard & Poor’s downgraded Britain to AA from AAA. This was the last day those who sold on the headlines Friday were right.
The 13 trading days following that Monday the S&P 500 erased all of the losses following the “Brexit” and rose 8.36% to all-time highs as shown in the chart above. Investors are now faced with headlines screaming “Buy Now!!” and “Missed the run, here’s what to buy,” as if they can somehow “make up” the gains they missed out on. It is important to remember that headlines can be just as sensational at record high levels as well. Even though the S&P 500 closed on Monday, July 19th at a new record high of 2,166.89, it only sits 1.66% above the May 2015 high of 2,130.82 set over a year ago. Just as interesting, the Nasdaq Composite index has climbed to a new high for 2016 this week but still is over 10 points shy of its all-time high in March of 2000 of 5,048.62 set over 15 years ago. Investors need to be aware that media headlines can be equally as dramatic in up and down markets.
Attempting to time the market is one of the biggest mistakes investors have. Taking money out of the stock market in times of uncertainty and fear can make you feel safer but trying to figure out when the “best” time to put money back can be nearly impossible. No one has the ability to see into the future and know which direction equities will move. We advise our clients to try and avoid the sensationalized media headlines and stay the course during uncertainty sometimes enduring short term pain for long term gains.
Please contact us to see how we can help you during volatile times.