Bad News Everywhere … What Does That Mean for Stocks?
Roxanne S. from Wrightsville Beach, NC asks: Hello Mitch, I’ve been a bit disheartened lately with the slew of bad news. Inflation, the Delta outbreak, and now the situation in Afghanistan. It feels like some of the cards are stacked against the economy and the stock market. What do you think? Time to step aside for a few months?
Thanks for your note, Roxanne, and I empathize with your concern over the string of bad news this summer. Many Americans had been hoping the pandemic risk would be completely faded by now, and that the economy (and normal life) would be charging ahead. Not only is the outbreak currently worsening, but there are also the layered concerns of inflation pressures and a messy situation in Afghanistan.
The confluence of bad news has many people concerned. An August survey from the University of Michigan found that the U.S. Consumer Sentiment Index (CSI) fell to 70.2, which was far below the 80+ expectation and marked a -13.5% decline from July. The only other times the CSI has fallen so steeply was October 2008 – at the cusp of the Global Financial Crisis – and April 2020. And we all know what happened then.
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The University of Michigan survey cited “dashed hopes” from Americans who were expecting the pandemic to be over by now. Folks are clearly feeling a bit disheartened and erring on the side of caution, as it sounds like you are.
Consumer Sentiment Dipped
I understand the concern, but at the end of the day, it’s important to remember the stock market is forward-looking, while consumer sentiment is a coincident indicator. In other words, if you’re worried about how things look today, remember that the stock market is focused on how things will be six or even 12 months from now.
And looking ahead just one quarter, we can see that most U.S. corporations – whose sales and profits matter most to stock market returns – are still feeling good about the coming months and quarters. Total S&P 500 earnings in Q3 are expected to be up +26.2% on +13.3% higher revenues, and the chart below shows how Q3 estimates have been pushing higher since the start of the year. That’s a sign of more confidence, not less.
To be fair, the magnitude of upward revisions is on the lower side relative to what we had seen in the preceding quarter’s comparable period, but it is still quite strong.
The last point I’ll make is regarding the classic “wall of worry.” As bad news builds and folks become more cautious and skeptical about the economic outlook, it usually means that expectations for growth are revised downward – which ultimately makes the hurdle lower for the economy to clear. If expectations fall and the outcome is not as bad as everyone expects, those are the precise times you want to be in stocks, in my view.3
In times like these, when news headlines are causing investors to worry, the key is to not let your emotions get the best of you. The more you stay invested, the better your financial outcome will be!
If you have $500,000 or more to invest, get our free guide, How to Avoid Emotional Investing.4 It provides our advice, based on decades of experience, to help you navigate through turbulent times. Click in the link below to get your copy!
2 Fred Economic Data. August 27, 2021. https://fred.stlouisfed.org/series/UMCSENT
3 Zacks.com. August 13, 2021. https://www.zacks.com/commentary/1781776/3-things-to-know-about-the-q2-earnings-season
4 ZIM may amend or rescind the “How To Avoid Emotional Investing” guide for any reason and at ZIM’s discretion.
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