In this Monthly Market Advisor:

  • Investor psychology, driven today by concerning headlines, has historically had a negative impact on long-term investment results. When an investor worries about the headlines, it’s prudent to weigh the potential risks along with the potential returns.  
  • Long-term results can be impacted with an all-weather investment portfolio that matches an investor’s long-term goals.
  • Working with an investment professional may help in making the appropriate long-term decisions for your situation.

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On Wednesday, August 22, the current bull market officially became the longest in U.S. history (as measured by the S&P 500 Index). Despite this positive backdrop, investors often are overly influenced by headlines and let them impact their long-term investment decisions. There is a long history of investors reacting to headlines by making rash and, occasionally, imprudent decisions in their portfolios. Some also may be hesitant to invest new cash into markets based upon short-term concerns. It is part of the influence of fear impacting investment decisions. With this background in mind, we recently did some research on the year 1968. Below is a summary of events that created headlines 50 years ago:

  • The United States was heavily into the Vietnam War, with the Tet offensive early in 1968 deepening the conflict.
  • In January, a North Korean commando group came within blocks of assassinating the South Korean president.
  • North Korea captured the USS Pueblo and its 83 crew members and held them captive for 11 months. (North Korea has never returned the USS Pueblo.)
  • On March 31, President Johnson announced he would not run for reelection after recently almost losing the New Hampshire primary to anti-war candidate Eugene McCarthy.
  • Only four days later, Martin Luther King was assassinated. Nationwide protests followed with the National Guard being called out in over 100 cities.
  • Earl Warren resigned as Chief Justice of the Supreme Court; the Republican-controlled Senate refused to approve Johnson’s appointee.
  • The Soviet Union invaded Czechoslovakia with 250,000 troops.
  • In June, Robert Kennedy was assassinated the evening he won the California Democratic primary.
  • In August, the Democratic Convention produced fights in the aisles and the Chicago police attacked the protesters outside – while the whole world was watching.
  • In a very close election, Richard Nixon was elected president over Hubert Humphrey with less than 1% separation in votes. Third-party candidate George Wallace received 46 Electoral College votes.

Learning from the past

One can only imagine what the market’s response would be today from the above events with minute-by-minute coverage by the financial media. To put it in perspective – Wall Street Week – which was for many years the only investment-based show on TV – did not go on the air until 1970. We do believe there are important learnings from the past that apply to today:

  • Many current concerns seem new but in many cases have been experienced previously in our history. (Look at some of the topics – North Korea, Russia, elections, Supreme Court, protests. Similar events are happening today.)
  • Today, we suspect there is too much focus on headlines that impact investment decisions. At a recent money manager symposium held by Wells Fargo Investment Institute, one of the primary long-term risks sited by the group was the short-term nature of the markets fed by media reporting. The next time we all see concerning headlines moving the markets, investors should ask if the issue at hand has a reasonable basis to impact the U.S. or global economy. In many cases the legitimate answer is “No” – yet investors often still let headlines drive their decisions.
  • Investor psychology has historically had a negative impact on long-term investment results. The chart below shows the disconnect between market-based returns relative to average investor returns. In our view, investors should consider a consistent focus on economic and investment fundamentals; ultimately this, not headlines, is what drives global investment markets over the long run.

Average Equity Fund Investor Underperformed Benchmark

Source: Dalbar, Inc. 2018, 20 years from 1998-2017; “Quantitative Analysis of Investor Behavior”, 2018, Dalbar, Inc. www.dalbar.com. Dalbar computed the “average stock fund investor return” by using industry cash flow reports from the Investment Company Institute. The “average stock fund return” figure represents the average return for all funds listed in Lipper’s U.S. Diversified Equity fund classification model. All Dalbar returns were computed using the S&P 500 Index. Returns assume reinvestment of dividends and capital gain distributions. The fact that buy and hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. The performance shown is not indicative of any particular investment. Past performance is not a guarantee of future results. An index is unmanaged and unavailable for direct investment.

After reading the list on the previous page, you may be asking, “How much was the market down in 1968?” It had to be really ugly – right? In 1968, the S&P 500 Index’s total return (appreciation plus dividends) was +11.1%. For the five years starting January 1, 1968, the S&P had an annual average total return of 7.5%. This was certainly lower than historical averages but not the disaster the headlines above might indicate. The chart below shows the performance of the S&P 500 since the middle 1960s:

US Markets Often Have Shown Resilience Despite Crisis Events

Source: Wells Fargo Investment Institute: Bloomberg, Ned Davis Research. 6/30/2018. An index is unmanaged and not available for direct investment

Yes – the S&P 500 has gone from under 100 to around 2,900 today. Stock prices have gone up as the economy has grown and corporate profits have increased. Those are the fundamentals – where our focus should be as prudent investors. Investors typically don’t have the luxury of a 50-year time horizon (some do), but we don’t believe it should be one quarter either.

Avoid emotional investing; focus on long-term goals

This is not to downplay the challenges and risks that we see in today’s headlines. Some of them are real, some will never develop, and some will develop with no fundamental impact. We are now into the tenth year of the current economic cycle/bull market. Yet our read of the fundamentals indicates the risk of recession is relatively low over the next year, suggesting there is strong potential for this economic/market advance to continue. 

Some investors may be hesitant to invest excess cash because of the many fears that are apparent. History has consistently shown the best advice has been to avoid emotional decisions and create diversified investment portfolios that are based upon long-term goals. When an investor worries about the headlines, it’s prudent to weigh the potential risks along with the potential returns. Long-term results may be positively impacted by focusing on an all-weather investment portfolio that matches an investor’s long-term goals.

If you have concerns about the impact of headlines on your investment portfolio, speak with a Wells Fargo investment professional who can assist with making appropriate long-term decisions for your situation.