“I think the worst mistake you can make in stocks is to … buy or sell based on current headlines.
We were buying stocks on Friday and we’ll buy the same stocks today, and we’ll buy them a little cheaper. I never complain about buying things cheaper.”
(Warren Buffett on CNBC)
As 2017 came to an end, public investors were gaining confidence and pouring money into the stock market according to a CNBC survey. The economy grew stronger and several economists used the term, “Goldilocks economy” to describe the US investment environment, i.e. low unemployment and high GDP growth, but not high enough to cause inflation. Chart A, the Money Flow Oscillator, measures buying pressure, selling pressure and shows the rise and fall of stock prices through the first quarter of 2018.
Chart A – (Technical tool analyzing price and volume to determine overbought and oversold conditions)
Buying in January reversed to aggressive selling in February and a test of the February low in March.
Since the basic data on corporate earnings growth and on leading economic indicators remains consistently favorable, such volatile price movements in the first quarter, we believe, reflect the impact of headline news on investor sentiment. Indeed, some disturbing events covered by recent headlines and 24/7 coverage of world news events could strike fear into the hearts of investors. For example:
- The Fed announced a plan to move the Fed Funds up 3 times in 2018, 3 times in 2019 and 2 times in 2020. This raised fear of Fed induced recession and bond yields rising to a level higher than stock dividend yields, i.e. inverting the bond yield curve.
- Announced tariffs on US imports of strategic metals created fears of a potential trade war – which has always been negative for business profits.
- FaceBook’s use of personal information to boost advertising revenue and FaceBook’s possible effect on election results exploded into a privacy issue that may bring government regulations.
- There are many other concerns in the stock market’s “Wall of Worry” such threats of war on the Korean peninsula, US growing fiscal deficit, US rising trade deficit, high household and corporate debt as well as ever present fears of a stock market crash, etc.
(We do not believe that any of the worst case scenarios will occur or that the current news driven correction will significantly alter the long-term secular bull market.)
Warren Buffett’s advice (stated above) comes from his long history of making investments when headlines were disturbing and many investors were in a “flight to safety.” Investors would be well advised to heed Buffet’s advice and stay the course; unless the news events have a direct effect on corporate earnings or outlook.