The Distraction of Investment Noise
This has been a very noisy few months in terms of the information that investors have to think about.
The U.S elections have been a wild ride -- surprising and, in many ways, unprecedented. The odds that Britain will leave the European Union, and all of the negative fallout it might generate, has careened up and down in the polls. The recovery in oil prices, the weakness of corporate earnings, swings in economic data, the Zika virus, Islamic State -- all have dominated the news cycle at various times.
Deciding what to focus on -- and how much attention or weight to give to these issues and events -- is a challenge for traders and investors alike. On one end of the spectrum are macro investors such as Leon Cooperman of Omega Advisors. He obsesses over every possible fact, rumor, news release and data point, seeking a trading edge, however slight. Omega has outperformed its benchmarks for a long time. At the opposite end of the spectrum is Larry Swedroe of Buckingham Asset Management. He looks at the churning daily information flow as a costly distraction from the idea of letting assets compound undisturbed over the long term. His philosophy has helped Buckingham raise billions of dollars and advise on tens of billions more.
But those are the extremes. Most traders and investors lack the temperament for these radical approaches, finding themselves somewhere in between. Deciding what to consider, how to weigh it and what to ignore is a challenge.
Let’s look at some recent issues, with an eye on giving them a bit of context.
- Jobs: Every month, we see the fitful responses to the changes in the employment data. The addition in May of 38,000 jobs --– which doesn’t include 35,000 striking Verizon workers -- is at the low end of a monthly range that has been fairly consistent since 2010. We have beaten this topic to death (see this, this and this), but let me remind readers that the monthly employment situation report has a margin of error of 100,000 jobs. Then it gets revised, re-benchmarked and re-revised. So we don’t know if this was a one-off, an indicator that the U.S. economy is at full employment or the beginning of a recession. My guess is it was an outlier, likely to be revised to between 75,000 and 100,000 or so. But that is just a guess. No one knows yet.
- Brexit: If the U.K. referendum on staying in the EU were to pass, it would cause some headaches for all involved. However, Britain isn’t part of the currency union that uses the euro, suggesting to many analysts that much of the negative fallout would land on the U.K. itself. (For a different scenario, see what might happen if Greece were to abandon the euro.) For the past few months, the Brexit movement looked like it was going to lose. More recently, the polls have shifted, making it a much closer contest. My optimistic guess is that rationality prevails when Britons go to the polls on June 23. I am not a currency trader or an investor in U.K. financial companies, so what investors can do with this information is beyond me.
- U.S. elections: The presidential contest is heating up and dominates much of the U.S. news coverage. As we discussed, the campaign and the outcome of the election will have some impact on both bonds and equities. However, the claim that election uncertainty is a drag on markets has been greatly exaggerated. The next U.S. president will be either Hillary Clinton or Donald Trump. There is nothing uncertain about that. There are industries that are more likely to benefit from one candidate or the other, but until the parties have their conventions, polling data is unreliable. There are signs that Trump’s primary campaign momentum is slowing. My guess is that, as in 2012, an election that so many think will be close might end up as an electoral college romp.
- Zika: I don’t want to make light of a serious mosquito-borne illness, but the annual frenzy over the latest global disease outbreak has become an all-too-reliable ritual. Recall not too long ago that Ebola was going to infect millions -- as was swine flu, SARS, avian flu and, thanks to a few people foolishly opposed to vaccines, measles and mumps. This is why we have a National Institutes of Health, the Centers for Disease Control and Prevention and the World Health Organization -- to help deal with diseases in developing nations and prevent them from infecting people in the U.S.
- Earnings: I have watched the slowdown in earnings growth closely. Of all the things that are cause for concern, this is my biggest. On the one hand, the energy industry has seen its profits plummet as the price of crude oil fell. When a sector that once made up 11 percent of the Standard & Poor’s 500 Index has earnings fall almost to zero, it’s going to hurt. But that doesn’t explain the entire slump in earnings, especially in light of the big share-count reduction that has been occurring because of buybacks. If you are looking for something to be worried about, this seems like the one to watch.
One of the key tasks of an investor is to sift through the blizzard of data, news and information and winnow out the stuff that’s just noise. A good first step is to focus on what matters more and what matters less, and to think about why.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Barry Ritholtz at firstname.lastname@example.org
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