Tuning Out the Noise to Keep the Profits Rolling
February 6, 2017, 1:26 pm
It was a little over a week ago when the Dow cracked its 20,000 milestone and the S&P 500 traded above 2,300 for the first time ever, but the strength was short lived as the indices were overdue for a bit of profit-taking.
But profit-taking wasn’t the only thing that sent the market lower. Another catalyst for the selling was President Trump’s executive order that blocked immigrants from seven foreign countries from entering the United States. While the order itself won’t have much (if any) impact on the economy and market over the longer term, the media ran with the story and found ways to connect them anyway. And given that the indices were already oversold in the short term, it led to some anxiety and a reason for some investors to ring the register on stocks that had rallied the last couple of months.
However, that selling needs to be put into perspective. Yes, the S&P 500 experienced a four-day losing streak January 26 through January 31, but the index was only down 0.85% from its all-time closing high. In addition, the Dow and NASDAQ ended last week at new highs with the S&P not far behind. That shows the resilience of the bulls, as not even a flurry of executive orders – which the media deemed as very negative – was able to significantly bring down stocks.
One reason the bulls and the market have been so resilient in the face of growing concern over what will happen under the new administration is the underlying fundamentals. You may not know it from reading the headlines, but we’re actually in the heart of the fourth-quarter earnings season. The financial media continues to focus its attention on D.C. rather than Wall Street, so it has failed to focus on the fact that the season has so far turned out better than expected. Companies are beating expectations, which in turn helps improve the valuation metrics used by analysts, and as I’ve talked about many times in the past, improving earnings will be the catalyst that drives stocks higher over the long term.
This just goes to show that it can be difficult to tune out the noise and focus on what’s really driving the market, especially when there’s a lot of unpredictability coming out of the White House. But there are ways for investors to manage the ups and downs.
First, it’s imperative that we don’t react to news bombs when they explode as this leads to emotional decision making and overreactions in stock prices. It is much better to let the smoke clear and see what appears in the aftermath. Odds are that there will be nothing new behind the smoke – once again, it was just the media and investors panicking. But if we let ourselves get caught up in the noise, we’ll find ourselves investing without a strategy or edge. Without those, we have very little chance of making money.
Instead, it’s best to use the market’s overreactions to our advantage by buying on the short-term dips and selling into strength. The S&P 500 has been trading in a narrow range recently and is currently at the same level it sat at in mid-December, but there’s no question that underlying stocks and sectors are on the move. That’s a great place to start when looking for your next buying opportunity.