News and Markets: A Useful Lesson

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A core objective for me is to focus as much as possible on what I call the “message of the markets” and as little as possible on the headlines of the day. This is a long-term process that’s difficult to achieve, given human emotions. And it’s not always successful. After all, what is?

But the investment result over time has yielded superior results, in my experience.

Here are two short-term examples of how this works.

On Feb. 3, US stocks suffered their biggest daily drop since June 2013. The Dow Jones Industrials tumbled 326 points, or 2.1 percent, bringing the average’s decline for 2014 to 7.3 percent. The S&P 500′s 2.3 percent fall that day left it down 5.8 percent year to date.

US stocks had been hurt by several factors:

#1: Inevitable profit taking after 2013′s robust advance.

#2: Turmoil in the emerging markets, triggered by currency weakness, slowing growth, rising inflation and political upheaval.

#3: Evidence of a slowing US economy.

#4: The Federal Reserve’s gradual tapering of its quantitative-easing program, with its purchases of US Treasury and mortgage securities dropping from $85 billion monthly to $65 billion now and on track to finish at the end of 2014.

Nevertheless, starting on Feb. 4, the S&P 500 and the Dow have since rebounded 5 percent and 4.2 percent respectively in eight trading days.

The ostensible reason for the Feb. 3 decline was rising concern about the health of the US economy in the wake of several disappointing economic reports.

But the market rose the next day, despite headlines such as the Wall Street Journal’s “Turnabout on Global Outlook Darkens Investor Mood.”

By the way, the more growth-oriented ! and speculative Nasdaq Composite was down only 4.4 percent at its 2014 low at the Feb. 3 close and has since jumped 6 percent as of yesterday’s close.

It’s unusual that the most volatile of the three indexes held up the best during the downturn. This suggests that US investors weren’t overly concerned about valuations, emerging markets, the Fed or a possible slowdown in the US economy.

On Feb. 6, the Dow bolted to its biggest gain of the year, 188 points, supposedly because the weekly report of Americans filing new claims for unemployment benefits was better than expected.

The Dow then advanced another 166 points the next day. Yet Feb. 7 brought a lackluster report saying that US payrolls rose a seasonally adjusted 113,000 in January. This followed December’s dismal gain of 75,000 jobs, marking the weakest two-month stretch of job creation in three years. The Wall Street Journal headline: “Slow Jobs Growth Stirs Worry.”

This week, the Dow tacked on 233 more points as of yesterday, when a USA Today headline summed up the situation this way: “Stocks close higher despite weak economic data.”

As I write this, stocks are climbing again, despite another weak economic report.

For another example of how important the message of the markets can be, check out this year’s performance of gold and gold mining shares.

SPDR Gold Shares (GLD), the leading gold exchange-traded fund is up 8 percent so far, after a 21 percent decline in 2013. Analysts attribute the rebound to a renewed interest in safe havens, recent weakness in the US dollar, the signs of a softening global economy and more.

But the truth is that gold has always defied seemingly rational analysis. What we do know is that the yellow metal is gaining new fans again after bottoming at the end of 2013. At that point, it had declined 38 percent in more than 2-1/2 years.

What’s also striking this time is that the shares of gold miners are ! outperfor! ming gold itself. The two major miner ETFs are up 38 percent and 22 percent already in 2014.

But those ETFs had declined 85 percent and 70 percent respectively, during the aforementioned period when gold itself had declined 38 percent. And they had significantly underperformed gold itself during the bull run that ended in 2011.

As I write this, gold and mining shares are climbing again, for whatever reasons.

We’re not predicting here that both stocks and gold will continue to rise in the near term. But we do say, as Yogi Berra did, that “You can observe a lot by just watching.”

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