“As our omnipotent central planners descended upon Jackson Hole, Wyoming, this week, markets gyrated between exuberance and despair. After Fed Chair Powell spoke Friday morning, the threat of aggressive, Volcker-esque rate hikes tipped markets into … despair.”
Any number of factors can influence markets each day, week, month, or year, falling under the broad—and often differing—umbrellas of fundamental or technical analysis.
The major categories can include, but are not limited to, broad macroeconomic trends, fiscal and monetary policy, corporate earnings, specific economic data, company news, legislative or administration actions, elections, geopolitical risk, seasonality, sentiment of various market participants, and technical indicators. These technical indicators may include supply and demand, overbought/underbought conditions, trend-following versus mean reversion, and technical “levels” of support and resistance.
This is far from an exhaustive list.
The impact of news on investment decision-making
While I am not an investment expert, as a communications specialist, I find the impact of “news” on investment decision-making and investor behavior a meaningful and rich topic.
We have had no shortage of important news this year, with major headlines about the war in Ukraine, inflation and energy prices, U.S. midterm elections, political and economic developments in China, Biden administration initiatives, GDP and other economic trends, and Fed rate announcements—which is perhaps the most important news from a market perspective.
Bespoke Investment Group usually issues a visual review of major news headlines in the context of the S&P 500’s performance at the end of each month. July’s recap (posted on August 8—before the Jackson Hole conference) is an example of what investors have contended with over the past seven months.
Investopedia notes the following on government news releases (but this applies to any major news story):
“In the short term, these news releases can cause large price swings as traders and investors buy and sell in response to the information. Increased action around these announcements can create short-term trends, while longer-term trends may develop as investors fully grasp and absorb what the impact of the information means for the markets.”
This statement makes two underlying points that bear further discussion:
1. “Large price swings” based on news is a phenomenon that has only been enhanced in recent years by quantum improvements in artificial intelligence and sophisticated news-based trading programs employed by large institutions and hedge funds. The average investor has little chance of “competing” on a short-term basis in this environment.
You might be interested in the recent article “How behavioral finance is delivering alpha,” which delves into some of the many ways “data mining” based on behavioral analysis is now impacting the investment industry. The author writes, in part,
“One way to think of professional investing is as a zero-sum game among well-informed investors. If I win, then someone who is as smart and heavily resourced as I am must lose. …
“But there is another way to think about investing. As is often said in professional sports, ‘Take what the defense gives you.’ Rather than going after the best defender on the other side, pick on the weakest link—which isn’t as emotionally satisfying but a successful approach nonetheless. The starting point is the recognition that many diverse groups are driving equity prices. I refer to these as emotional crowds, because new information may provide the trigger but the resulting price is a response to collective emotional decisions.”
2. Developing “longer-term trends” can often be counterintuitive to the immediate face-value impact of any specific piece of news. How often have you seen a “Fed announcement day” trend reverse within 48 hours? Likewise, haven’t you often wondered who is making the decision on when “bad news is good news” (and vice versa)? Again, an individual self-directed investor is often left in the dust.
He points out several of the behavioral impacts for both market professionals and individual investors in processing the latest news:
“The fact is that our brains already employ a host of shortcuts to deal with all of the information we are currently exposed to. We use availability bias to give more weight to the most recent information. We use representative bias to overweight anecdotal information. And we use herding to overweight what others are doing. All of these are ways in which the brain arbitrarily reduces the available information to something that can easily support a decision. None of these heuristics make the decision more valid or accurate.”
“It is certainly important for financial professionals—if not all investors—to stay well informed on the latest political, business, economic, and market developments. But it is equally important to recognize that short-term, news-driven investment decisions are generally not a wise course of action—especially for individual investors who may lean toward overreaction.”
Flexible Plan Investments’ approach
Flexible Plan Investments (FPI) was built around quantified, active investment management, and strategic diversification. (You can read more about FPI’s philosophy on research and strategy development here.)
FPI may have opinions on, say, the economy or the impact of an election, but as FPI’s now-retired VP of business development, Peter Mauthe, noted, “Those opinions have no bearing on how we make investment decisions. Instead, we are focused on the data, rule sets, and results that help guide us to being invested on the correct side (long, inverse, cash) of all markets. … Flexible Plan views the news of the day, week, or month objectively and agnostically. We are not concerned with ‘being right in our view.’ We are concerned with being on the right side of the trend of each of the markets (stock, bond, alternative) in which we participate.”
The bottom line? I think it is reassuring for financial advisers and their investor clients that whether markets are facing a “news-rich” and volatile scenario—or a relatively benign period—FPI offers a holistic portfolio approach and strategies that can be responsive to virtually any market environment.