Do you ever read the business news and find yourself wondering exactly what you should or shouldn’t believe? Do you find yourself thinking there is a “big picture” behind the story and you just don’t know what it is?
And have you ever noticed that at almost any point in time there is an “apocalypse du jour” – a serious event widely predicted in many news stories for months that never happens? Remember Y2K? More recently, we had fears of a debt collapse in the U.S., Europe and then in Greece, the collapse of the dollar because “the Fed is printing money”, and recession fears from the debt ceiling debate and the “sequester”. That is six stories in a row that did not happen!
All these stories were widely covered all over the news for months and then just did not happen. Why are forecasts in the business news so often wrong?
Based on my experience, here is what you need to know:
Market calamities forecasted in the news are unlikely to happen
Most of these stories are either wrong (like Y2K), exaggerated (like U.S. debt), or assume that nobody will do anything about it (like the collapse of the European Union).
News rarely affects markets much because it is already “priced in”
If you read or hear the same news story in more than one place, it is likely investors already include it in the price they are willing to pay for stocks. If it then happens in the way it is expected to, it should have little or no further effect. What moves markets is surprise.
The news tells you the mood of the market
When you see many stories predicting a market crash, it is best to interpret this as telling you that investors in general are pessimistic. Don’t worry about the event. Just read the story based on what it tells you about the mood of investors.
Most of the time, there should be a balance of optimists and pessimists. When the general mood of investors becomes quite extreme in either direction, you can assume it will likely normalize soon. Overly pessimistic markets tend to rise. Overly optimistic markets tend to fall (or just go nowhere for a while). Moods always tend to normalize over time. How long can you stay terrified?
For example, in October 2012, news stories bombarded us with fears of a U.S. recession because U.S. debt was too high and two artificial deadlines were looming (“debt ceiling” in December and “sequester” in March 2013). I felt that the mood was far too pessimistic, which told me it was a good time to invest. All the fear was priced in and exaggerated. As the fear subsided, the S&P500 shot up 21.2% from November to May 2013 (Morningstar).
What is the mood today?
Despite the big rise in the last 6 months, most investors are still pessimistic. News is focused on the next “apocalypse du jour” – will the markets collapse when the Fed stops stimulating?
The news media is good at telling you the general mood of people or of investors, but it is nearly hopeless for predictions.
About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching. If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com. You can read his other articles here.