September 13, 2013
Title: Putting market “noise” in perspective
Subtitle: Seasoned long-term investors generally discount headlines about events such a possible attack on Syria and the upcoming debt ceiling negotiations and German elections.
Global equities indexes had a rough August (with the exception of Toronto’s S&P/TSX which rose slightly). Much of the weakness was due to concerns that the US Federal Reserve would taper its quantitative easing program, which had been putting downwards pressure on interest rates. This has spurred a rise in rates which is starting to boost businesses’ costs and is reducing the relative attractiveness of stocks.
Fluctuations in equity prices were also driven by talk of an impending US military strike on Syria. Worries peaked in early September, when Secretary of State John Kerry appeared before Congress, to request legislative approval for the attack. Several days later stocks bounced back, when hopes of a settlement surfaced following a meeting between US President Barack Obama and Russian President Vladimir Putin.
Seasoned long-term investors tend to regard those Syria-related events and similar short-term developments, such as the US debt ceiling debate and upcoming German elections, as “noise.” “Noise” type story lines, can be distinguished from structural movements (such as changes in monetary policy direction) because although they can have real impacts and often generate considerable volatility in markets, their longer-term effects tends to be more ephemeral.
True any US attack on Syria could have repercussions. Possible challenges to oil transiting through the Suez Canal and the Persian Gulf have been cited, as has potential Syrian retaliation. However the US has successfully launched military strikes in more than half a dozen countries during recent years without sparking any material retaliation. The fact that Syria has been unable to respond to repeated recent attacks by Israel, suggests that a US strike is unlikely to stir reprisals either.
Concerns over the need to raise US the debt ceiling have also proven to be overblown in the past. Worries about possible effects date back to the 1990s, when House Republicans, led by then-speaker Newt Gingrich caused a temporary government shutdown. However the party lost eight seats in the chamber in the subsequent 1996 elections and has not forgotten that lesson.
Worries about the German elections, in which Chancellor Angela Merkel is seeking a third term in office, also appear overblown. True, Germany is Europe’s largest economy and Merkel, has been the continent’s strongest proponent of sound fiscal management. That said, there are 27 other countries in the European Union, with Germany accounting for only about 20 percent of the continent’s gross domestic product. Furthermore, left-wing parties have governed Germany soundly in the past and there is no reason to think they would act differently this time.
Of course none of this means that investors should disregard developments they hear of in the news. Television, Internet and print stories can have a crucial impact on market psychology. However successful investors tend to focus more on structural trends such as demographics, productivity data and company analysis, when making their decisions about where to put their money.
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