By Randall Coleman
The word of the week is “inauguration.” Wednesday is inauguration day, bringing with it all the pomp, circumstance and government transition associated with it. The United States will have a new president and vice president and how will markets react? (Quiz time!): Stocks will A. Surge; B. Plummet; C. Remain Unchanged; D. None of the Above; or possibly, E. All of the Above? If history is a guide—history rhymes, you know—the answer is easy to figure out. The first step is dissecting words.
Sensational headlines grab attention. Loud commentators hold on to audiences. Blinking lights and ringing bells attract gamblers to slot machines. It’s human nature. But are those headlines accurate? A quick glance at the screenshot below shows the verb “plunge” indicating downward price or index movements. With no regard for the magnitude of the decline, the writers use the term “plunge” to indicate declines between -3% to -32%.
Similarly, descriptions of positive movements are just as meaningless. As you can see, “soar” means anything from a +3.1% increase to a +163% increase.
In order to make sense of financial news reports, we have compiled a helpful reference for a number of the more common words frequently used to indicate price movement. We selected a sample of real-life headlines and/or text from financial journal articles using the listed words to indicate market action. The results are below.
Portfolio managers deal with numbers. Numbers are exact, precise, clear. In a word, numbers are quantitative. Words are grey, interpretative, subjective. They are qualitative. As we’ve seen, verbs to indicate stock price movement are a particularly good example of vagueness and imprecision. These words can be segregated into two categories: up and down, positive and negative. As it turns out, this is about as useful as these words get. What finance people really want is a vector, which indicates direction and magnitude. As it is today, all we get from journalists is direction.
With this in mind, we can return to our question about Wednesday, inauguration day. For historical comparisons, we noted market performance (S&P 500) on three days for the past 15 presidential inaugurations. The three data points recorded are index performance on inauguration day itself, performance through one week later and performance through the end of the month. The results are here:
As we can see, the market is generally not excited about presidential inaugurations. It’s worth noting that the biggest daily change came in January, 2009 in the final throes of the Global Financial Crisis. Was the incoming president responsible for the GFC? No, nor was he responsible for the market’s performance through the end of the month, the second-best result in our table for that time period. The reminder in all this is that the market is forward looking. Much farther forward than a week or a month. Marketwise, inauguration day is a nonevent. The importance of the day derives from market confidence in the orderly transfer of power and adherence to the rule of law.
Our investment decisions are long-term choices. We don’t get caught up in “flavor-of-the-week” trading ideas. Our investment horizon is truly that: a horizon, not tomorrow’s earnings announcement. As such, our portfolio composition is built to outlast presidents. The last one, and the next one.
So, look to Wednesday and hang on to your chapeaux! Stocks will E. All of the Above.
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