Zacks Investment Management

We live in the digital era. For investors, this means having the ability to consume an updated news story at every second of every day. Investors can also curate their consumption of news, by only choosing to follow or believe news stories that reinforce a certain point of view. In behavioral finance this is known as “confirmation bias,” and it can lead investors to make decisions based on emotion – instead of hard data.  And that’s problematic.

We also live in a time when financial news outlets prefer to focus on uncertainties and the potential for negative effects, versus the fundamental data that investors need to make informed decisions. When corporate and economic fundamentals are strong, it tends to get short-changed. For example, it was not widely reported that corporate earnings posted solid gains in Q3 with more expected from Q4 as well. The reason for this kind of selective reporting is simple: optimism doesn’t sell papers, negativity does.

Three Overblown News Stories from 2016

Last year was rife with negative news stories that many thought would break this bull market, but each one turned out to lack the power necessary to do so. Here are three:

• China’s Economic Hard Landing – markets responded negatively to China’s second devaluation of the yuan in January, and fears mounted quickly as Chinese shares plummeted. News outlets everywhere were calling for an economic “hard landing,” with analysts also projecting a debt crash with the debt to GDP ratio rising to some 300%. Mutterings of bad loans pervaded the coverage, and in January Chinese stocks declined so sharply that many were convinced they would take global shares down with them. The real outcome? China expanded essentially on target last year, with growth in the 6.5% – 7% range, and global stocks posted solid gains.
• Brexit – Besides the election of President Trump, the Brexit referendum was perhaps the most surprising economic and political event of 2016. The idea of Britain leaving the European Union brought into question the stability of the economic region, and investors and analysts started to question the future of the European Union. Doomsday economic scenarios followed, with many predicting recession for the region and major market fallout. Stocks were volatile following the news, but prices recovered within a few days and UK stocks rallied swiftly in the weeks following the vote. For as much attention as Brexit received, it was a non-starter for having equity market impact.
• Deutsche Bank (DB) – Concerns mounted when DB’s U.S. unit failed the Federal Reserve’s stress test in June, and it reached somewhat of a tipping point as the Department of Justice announced it was seeking $14 billion for Deutsche’s misstating of risks associated with mortgage-backed securities. With Deutsche Bank’s role as a centerpiece in the European financial system and as a major counterpart to all relevant European banks, the unwinding of this situation was labeled as critical to the functionality of the European capital markets. Analysts were going as far as to label Deutsche Bank as having a “Lehman Brothers” moment, which obviously implied complete global catastrophe. The reality? Global markets shrugged off the story and Deutsche Bank is up over 40% since the story broke. You get the picture.

Bottom Line of Investors

My advice to investors is simple: when you see a news story that feels alarming and that commentators say could have a big, negative impact, do not act immediately. Instead, ask more questions and read multiple news sources such as this one! Last year, I wrote about China fears, Brexit, and Deutsche Bank, and in each case I discussed the positives and negatives and made the argument that stocks could withstand the negatives. I persisted throughout the year in saying that I believed stocks had more upside ahead – not because I’m an eternal optimist, but because the data supported my view. And that’s what matters at the end of the day.

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