Headlines

.

   By Guest Blogger Ryan Lewenza

.

It’s truth time. I have a love/hate relationship with the financial press and media. I believe they do a lot of good by educating readers on the economy, financial markets, and overall financial literacy. I’m even a participant in this through my regular BNN, Globe and Mail, and various other financial media interviews. Sure, there are some occasional duds on BNN and CNBC (I hope I’m not one of them!) but by and large they help to inform and educate viewers, which clearly is a good thing.

However, the financial media can also let us down through incomplete reporting and scaremongering. Media can and often do contribute to the market declines and volatility. And you have to step back and understand why. Like any business, media outlets need to sell a product, in this case information, to meet their expenses and make a profit. To do this they need eyeballs and readers and to ensure they get maximum coverage they need to deliver big headlines.

Headlines, like the ones below, get the attention of readers, which helps sell more newspapers and garners more clicks. And since we’re all human beings, and therefore impacted by our human nature, these headlines can influence our behaviour and decision making. So, a regular market decline leads to negative headlines from the press, which in turn impacts our psychology and behaviour, and often manifests in investors selling stocks. Rinse and repeat.

Examples of negative market headlines

Source: The Street

Let’s review the recent market decline and coverage from the financial media.

For the last few years, the critical investment question was whether the US/global economy would fall into a recession or experience a soft landing as a result of the Federal Reserve’s (Fed) aggressive rate hikes. US benchmark rates surged from 0% during the pandemic to over 5% today. The Fed, and other central banks, hiked rates to slow down the economy, consumer spending, and housing to help address the out-of-control inflation.

US and Canadian inflation hit peaks of 9% y/y and 8%, respectively, in 2020 but has steadily declined, currently around 2.5-3%. This, while the US economy has continued to grow with Q2 GDP of 2.8% q/q. For Q3 the Fed’s economic models are pointing to GDP growth of 2.9%. Hardly the signs of an imminent recession.

So, the Fed had a daunting task to thread the needle and hike rates just enough to slow down the economy and address the inflation, without tipping it into a recession (i.e., triggering massive job losses).

Then, late last week we get the big US nonfarm payrolls report, which showed that the US economy created only 110k jobs. While this came in lower than expectations of 185k, it was still a positive number and continued the long trend of positive monthly job gains for the US economy. In fact, the US economy created a smaller 108k jobs in April, but the equity markets barely even noticed.

Personally, I think the focus from this report was more on the increase of the unemployment rate, which rose from 4.1% to 4.3%. This one report and economic number then triggered a huge debate on whether a hard landing or recession is here or very close, with equity markets then experiencing its first real pullback/decline since last October. And the financial media were right there, setting off alarm bells that the sky is falling with this economic report, further inflaming fears of an economic/market meltdown. It took only a few down days to bring out the doom and gloomers with some claiming this is the next great recession and financial crisis.

We and so many others have talked about and hoped for a soft landing, which is the combination of easing inflation but still positive economic growth. As of today this is exactly what we have, yet it took one disappointing jobs report for markets to overreact and the financial media plowing on with headlines of a looming recession. This is my frustration with the financial media.

US nonfarm payrolls and unemployment rate

Source: Bloomberg, Turner Investments

There was little to no mention of other relevant market facts. For example, the fact that the S&P 500 had rallied over 18% in the first half of the year with barely a down week or two. Or that the markets are now in their worst seasonal period with August through to October often being down months, especially in US election years.

In a recent blog I crunched the numbers and found that on average the S&P 500 falls 6% from August to October, ahead of US elections in early November. Nor did they highlight the simple fact that market volatility is completely normal when investing in stocks, and in fact, is the toll investors need to pay to realize the long-term returns from the equity markets.

I always like to remind clients and readers of this. In an average year the S&P 500 experiences three pullbacks (5-10%) and one correction (10-20%). And I like to reference the data and chart below. The chart provides the annual returns of the S&P 500 going back to 1980 along with the maximum drawdown or decline in each year. Note that the average maximum decline in any year is 14%.

None of this information or context was provide during this sell-off. Instead, most of the headlines were of an impending recession based on ONE economic report.

So, today’s message is to understand how the financial media and press report on these market events and corrections. Recognize that sexy and scary headlines sell newspapers and advertising space. That reporters often don’t have the full story and may have a bias or agenda. And most importantly, once you understand this, try to block out the noise of these headlines so that you don’t overreact and do something silly by going to cash and trying to time the markets.

Corrections are going to occur, and you need the knowledge and fortitude to stick to the plan and remain laser focused on the long-term. I can almost guarantee that we will forget this recent market decline in the months and years ahead.

S&P 500 returns with the maximum yearly drawdowns

Source: Bloomberg, Turner Investments

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.