News Headlines: An Investor’s Worst Enemy.

If it bleeds, it leads. This common saying in journalism refers to the notion that the more horrific or negative a story is, the more prominent it is displayed on the front page. This is certainly true of financial news headlines. Most of what you read on a financial websites and in a newspapers is just noise. Investors should never make investment decisions based on what they see in a headline. Rather than help you make good financial decisions, the media is more likely to scare you until you can’t sleep at night or cause you to sell all of your stocks at the first sign of a correction.

It is very likely the stock market is going to have a correction at some point this year and we may already be in one. The S&P 500 is off approximately 3.5% from its recent high. You can bet if that number reaches 6% or 7%, the media is going to begin writing stories about the death of this bull market and a possible recession ahead. Not very many reporters are going to write stories about how corrections are a normal and healthy part of bull markets and that we were overdue for one.

Since early 2009, we have had a bull market with stock prices rising approximately 145%. But if you had just paid attention to the headlines, you’d think the global economy could collapse any day and the U.S. is still mired in a deep recession. The fact is, we are in the midst of a recovery from the worst financial crisis since the Great Depression, but financial media outlets are constantly highlighting negative data while ignoring the more abundant positive data. To the media, bad news is bad news, and good news is bad news.

Take an example from yesterday’s  headlines. Most major financial news outlets published a headline saying  something like “PIMCO Sees 60% chance of Global Recession in Five  Years.” The articles never discuss where the 60% statistic came from; it  was seemingly an arbitrary number.

Furthermore, the media never  discusses how it is exceedingly difficult to predict what the market  will do in the next 12 months, let alone predict what will happen in  five years. There are so many changes that will happen between now and  2018 that it makes a prediction five years out seem a little dubious.  What technology will we be using in five years? What will healthcare  look like in 5 years? Who will be the President of the United States?  How these examples will affect the global economy in five years is  anyone’s guess.

The key detail that investors must recognize is that  it is in the media’s best interest to highlight the negative. Imagine  that you’re standing in front of two newspapers. One says, “Stable  Economic Growth to Continue in 2013.” The other paper says, “Global  Economic Collapse Imminent.” Which paper are you more likely to buy?  Most people would buy the latter.  Even though the first headline is  more likely to be accurate, it’s not very interesting.

In recent  weeks, the financial media has had its bull’s-eye on the Federal  Reserve’s Quantitative Easing program. Reporters search out sources that  tend to be bearish and ask them what effect QE will have on the  markets. Since these “experts” typically see the world through bearish  eyes, they are going to say it will cause a calamity. Now the reporter  has a story and a headline involving the word “calamity.” Another  example is the weekly jobs report. If expectations are not met, the  story is bearish. If expectations are met, or exceeded, the story is  bearish because it means it could signal an end to the QE program.

The  problem with financial news is that they need new stories every day but  the global economy is like a freight train. It accelerates slowly and  decelerates slowly. Economies don’t change day-to-day so it forces the  media to extrapolate one data point into the distant future. In reality,  when data, like the jobs report, is released, it’s just a week’s worth of data.  The data is going to be volatile just like stocks. In a  recovery, some weeks will be good, some will be bad. You need to look at  the long-term trend to find any meaningful data.

Another major area  of concern with the media is the monumental shift that happened with the  advent of 24-hour cable “news” channels. Back when there were only  three network channels, NBC, ABC and CBS, the entertainment and news  divisions were kept completely separate. The news departments didn’t  have to worry about advertising revenue.  They just had to concentrate  on reporting the news. In exchange for their broadcast frequency,  networks were mandated by the government to devote a certain amount of  time to news. Today, the wall between news and entertainment no longer  exists. News broadcasts are competing for the same advertising dollars  as entertainment. This has led to more and more sensationalistic news  stories and fear mongering in the financial media.

I’m not saying to  completely ignore the media. Instead, make investment decisions based  on what you need investments to do for you.  Do not be scared by  whatever the media happens to be focusing on. Find objective data and  work from there. Don’t assume that because someone is on television that  they know what they are talking about, and don’t let the media affect  your long-term investment strategy. Remember, it’s mostly just noise  that should be ignored.

 

Source: www.zacks.com, by Mitch Zacks, Senior Portfolio Manager.

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