Why a Long-Term Perspective for Investors is So Important Right Now
One of the biggest traps for those who are involved in financial markets is what is known as “headline risk” -- the danger that we become caught up in short-term news and lose perspective. It is easy to do that, especially when is so often tailored to cater to our political and other biases. Some media outlets are focused on inflation to such an extent that you'd be convinced that we're living in the second coming of the Weimar Republic. According to those sources, it is only a matter of time before we need a wheelbarrow full of cash to buy a loaf of bread or, more topically, a dozen eggs.
While egg prices really have risen sharply, I’m not sure that an outbreak of avian flu is really a product of monetary or fiscal policy, and certainly not of who currently inhabits the White House.
Other media sources, meanwhile, focus on a solid couple of weeks for the market and ignore the fact that the S&P 500 is still down fourteen percent from where it was a year ago. Or they look at outperformance in risk assets over the last week or so and conclude that they will recover completely or even take the lead this year, even though they have been underperforming for a long time for good reasons. Their inflation coverage is all about recent improvement in the numbers, not the fact that prices are still rising faster than at any point in most people’s lifetimes.
Faced with that, what is an investor to do? While it may seem logical to think only about fundamentals if you want to avoid headline risk, paradoxically, studying charts, which is generally considered technical analysis and short-term in nature, can be one of the most useful things you can do. But the catch is this: I am not talking about looking at an intraday or one month chart to look for significant price levels here, but rather long-term charts to give some perspective to these headline numbers.
If we do that with wholesale prices, for example, it sheds a slightly different light on this morning’s PPI report, which showed that producer prices fell by a much higher than expected rate last month, 0.5% instead of the expected 0.1%. That is good news, of course, but there were details that made it less good than it might first appear, such as the fact that the ex-food and energy number came in right as expected. The real implications of all of that become clear when you look at a long-term chart for PPI such as this:
That view clearly indicates two things: the good news is that we are trending the right way, but the bad news is that wholesale price inflation is still extremely high.
Similarly, if we look at a long-term chart for two of the major stock indices, the Dow and the Nasdaq Composite, things look a little different than they may seem based on the headlines, on many different levels.
From a general perspective, the bump over the last week or so looks fairly inconsequential in the context of the downward trend. We are moving higher, but that has happened before on the way down, and the trend itself is still intact. Despite that, though, it is also clear that if you invested in stocks ten years ago, you would be doing fine right now, despite this recent drop.
That ten-year view also shows that those who focus on a faster rate of decline in the Nasdaq than the S&P 500 are telling the truth, but it is a truth that is misleading for long-term investors. If you had invested in the Nasdaq Composite, you would be up 285%, versus the (still respectable) 180% for the S&P 500. Tech stocks are more volatile, but more profitable over time.
Add all this up and you start to arrive at an investing strategy that makes sense: Be patient. The news is better right now but we are still not out of the woods, and while this Fed isn't always consistent, they probably won’t change tack soon.
That said, though, the worst is probably over, and if you do start to dribble in any cash you have, don’t be too conservative with what you buy. The global economy, and society as a whole, is in a massive period of transition, and tech will continue to lead the way for a long time to come. Keep those two things in mind and the charts suggest that, over time, you will do just fine, no matter what the headlines may say.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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