Don’t Buy the Hype! The Investment Risks of Misleading Headlines

Jim Lowell:
Hello, this is Jim Lowell and I’m the chief investment officer at Adviser Investments. I’m here with another The Adviser You Can Talk To Podcast and I’m joined by Dan Wiener, chairman of Adviser Investments. And today we’re going to talk about buying the hype, the risks of being misled by the news. Before I begin, let me reiterate our empathetic understanding of COVID-19’s profound human and economic toll. While we are thankful for the market’s rebound. We know this virus has taken and may yet be taxing upon us. And as importantly, we want to reiterate our firm’s resolve to stand with those who protest the sickness of discrimination in all its myriad forms. The steady increase in chaotic headlines and headlines of chaos from trade wars, to virus fears, and helpful protests and more make obtaining and maintaining a rational perspective that outlasts the day to day moments increasingly difficult.

Jim Lowell:
As long-term investors, it is of course, our job to do just that. And in this week’s The Adviser You Can Talk To Podcast, Dan and I wanted to weigh in on how we treat the daily barrage of news. Dan, no doubt these are frightening times as well as hopeful times. Let me start by asking you which news sources you turn to on a daily and weekly basis.

Dan Wiener:
Well, as a lot of people at Adviser Investments know, I’m a reader and they know that because I’m constantly shooting articles and links to them at sometimes late at night on a daily basis, I would say, I read cover-to-cover The Wall Street Journal and I take some pride in this I’ve been reading The Wall Street Journal cover to cover since the early eighties, when I got my first job out of college, having never read The Wall Street Journal before then. I’ll look at The New York Times, Bloomberg, The Washington Post. I’m a subscriber to a number of magazines, including Businessweek.

Dan Wiener:
I look at quite a few business-to-business publications, primarily online, but a few of them do come in the mail still. And I read a couple of blogs that I find particularly interesting. Something that I do, do is I collect a lot of string, which is something that journalists do in that they collect lots of articles about a particular topic and store them together, build little balls, in the hopes that at some point, when you want to really dive into a particular subject, you’ve got lots articles and stories at your beck and call rather than trying to search through the internet. So yeah, I do quite a lot of reading and I collect quite a lot of string. And what about you, Mr. Lowell?

Jim Lowell:
I’m just like you, Dan. If we looked at all of the journalistic strings that you’ve been accumulating over the decades, it would look like the moon had landed on your house in Brooklyn. In terms of the kinds of things that I read. Certainly, reiterate the sources that you just mentioned, especially The Wall Street Journal. On the weekly frame, Barron’s, absolutely The Economist when I can, although I almost always end up feeling guilty because I can never quite get all the way through it. I also look at The New Yorker, The Atlantic for sort of a cultural vibe. On a day to day basis, I wake up the first two sites I look at are CNN and Drudge Report to give me a sense of the mood and the momentum that’s likely to be affecting the daily marketplace, but clearly neither one of those sites has any real lasting value in terms of a disciplined approach to the market.

Dan Wiener:
Your listing those two sites is a great segue into this topic of being misled by quote-unquote “news,” not buying into the hype of the headlines. I mean, there seems to be a lot of factual and fear-mongering headlines almost side-by-side, particularly during this pandemic and during this bull market turned to bear market, turned to bull market turned to bear market, turned to bull market. We really don’t know which way it’s going. I saw one the other day that I sort of thought was putting the cart before the horse, “Pandemic and protests can’t stop markets.” I mean, what do you think about that?

Jim Lowell:
Well, I can say, I hope that it turns out to be true, but first off, protests are not about stopping the markets. They’re about addressing racial discrimination, which may, down this year’s election road, turn toward more than politicking the issue of economic inequalities here. As mass scenes of peaceful protests continue to, I think, overwhelm particular images of looting, for example, the march towards progress remains hopeful, but I don’t think we’d be surprised to see more images of violent unrest along the route to peaceful protests, especially in more urban areas during this sweltering summer, but the markets will likely stay more focused on medical data and more current fundamental data, economic data.

Jim Lowell:
So that’s things like earnings, interest rates and also the jobs numbers as they come in to drive its direction. And I’d say on that score, we’re seeing what we said we would see. In terms of medical data, States that reopen first are clearly seeing what I would characterize and I’m not a doctor, but I would characterize them as a fairly dramatic spike in new hospitalizations. And so the likelihood of a second wave manifesting itself is there. But I think the markets can now counterweight that concern with a belief in a more capable response than during the first wave.

Dan Wiener:
I can’t even wait to see what kind of burst or bloom of cases we’re going to see coming through all these mass protests.

Jim Lowell:
Yep.

Dan Wiener:
The level of social distancing was pretty minimal. Although, I was happy to see lots of face masks and people were outdoors, but I do think there’s a good potential for some blooms of infections to come from these protests.

Jim Lowell:
I definitely think that’s right. And I know we also think that the market may be able to buffer second-wave concerns a little bit better this go-round, given recent economic data, which at least economically speaking does suggest we’re taking a term from the worst of times to less-worse times.

Dan Wiener:
Yeah, but then you see headlines like this, Gary Shilling, “Recession will last into 2021.” He still seems to get an awful lot of publicity for these crazy headlines, his crazy forecasts and headlines. And yet I love the fact that there are people out there who are making forecasts. We talked about this internally about these forecast for earnings. How do you know what the price-to-earnings multiple is on the stock market when you don’t know what the earnings part of that PE ratio is? Corporate executives are providing little to no guidance, which is basically a term that Wall Street uses to let people know that they’re sort of forecasting. They’re looking into their crystal balls. Look when companies are running smoothly and the economy seems to be running smoothly, they can forecast. But the guidance, the forecast that these corporate executives are providing today, is almost nil.

Dan Wiener:
So number one, we don’t know where people are getting these comments about the market being expensive or the market being cheap because PEs are low or PEs are high because the E in that equation is unknown. And then you have a guy like Schilling saying the recession will last into 2021. That’s the headline. How does he know? We’ve seen more bounces in economic data. The Economist had the last jobs market report all wrong, right? They thought we were going to lose another, what, 7 million jobs? Instead, there was an increase of 2.5 million. I mean, we’re in unprecedented times in terms of making forecasts. So I don’t know, I take it all with a huge grain of salt.

Jim Lowell:
Speaking of unprecedented times, Dan, the soothsayers, the forecasters in a time of plague is probably nothing new in the big arcs of history. And to bring it closer to home in terms of what you were just saying. I mean, I think we think that the market is probably a little bit ahead of the medical and socioeconomic facts on the ground and is likely to exhibit increased volatility, I would say for the foreseeable future. But, well, we do not think that what is transpiring today will stop the long-term market gains in their tracks. I certainly want our listeners to know that we would not be surprised to see sort of known events and, or an unknown catalyst derail markets in terms of a correction of some magnitude in the very short run, but longer term, today’s headlines effectively fade into invisibility.

Dan Wiener:
Well sure. But as managers of people’s money, it’s easy to say, and we say it all the time. If you have a long long-term perspective, stocks will outperform bonds. Bonds will outperform cash, look out 10, 20, 30 years that has been the case, but there are periods when that doesn’t hold true. And of course, we’ve recently seen some headlines around that as well. The one that about how stocks will trail bonds over the next decade. I mean, give me a break. I think you and I talked recently about with our clients about the headline that bonds outperformed stocks over the last 20 years. Well, if you look at a single point in time, yes, that was absolutely true.

Dan Wiener:
But, I forget the numbers… 80%, 90% of the time, 95% of the time over a 20-year period stocks outperformed bonds. So, this latest headline about stocks trailing bonds over the next decade, I find that for two reasons, very hard to believe. Number one, because history says stocks will outperform bonds. And two, because bonds here are paying such low yields and yields are the great indicator of what future returns would be. It’s very hard to see a 10-year return on stocks being lower than for instance, the 10 year return on the treasury, which is below 1%.

Jim Lowell:
Well, you and I clearly both agree on that. It doesn’t mean that we don’t build portfolios that are well balanced and use bonds and cash as buffers for volatile times, especially over short-run spurts. But we definitely believe that long-term equities have not only outperformed bonds, but are likely to continue to do so. And of course, many of the battleship blue-chip stocks that our managers invested and that we invest in alongside of the managers are delivering dividends that are significantly greater than what you could find in the bond markets, so they have an income–

Dan Wiener:
Part of my point here is that while we know over the long haul, that stocks will outperform, we’re dealing with human nature here, and we’re dealing with human clients who cannot always sustain the 50% decline in the stock market like we saw during the financial crisis. They can’t always handle the 35% very precipitous decline we saw in the stock market that bottomed out in a matter of weeks in March of this year. And that’s why these headlines are so, I don’t know, would you call it disingenuous or just fear-mongering?

Jim Lowell:
I think fear-mongering cuts right to the chase. And you just mentioned, a fear of a 50% decline. Maybe that’s a good segue to talking about headlines that we’ve been seeing on an increased basis, which are the doom and gloom forecast for second-quarter GDP.

Dan Wiener:
I know where this is going. I know where this is going.

Jim Lowell:
Minus 50% for the second quarter, I mean, Dan, does that mean that our economy’s been cut in half?

Dan Wiener:
I love that. Yes. The 50% decline in GDP, this is going to be the headline that I think is going to blow a lot of investors out of the water. And it shouldn’t because the way a lot of economic data is reported is on something called an annualized basis where the current quarter’s numbers are pushed out four quarters to give you what they call an annualized number, which makes the assumption that what happened in the current quarter will continue at the same pace for the following three quarters. We’re looking at the potential for a 15% or 16% decline in economic activity during the second quarter of this year, during the quarter, that’s going to end at the end of this month. And if you take that 15% or 16% decline and you continue it another three quarters, you get what the typical standard will tell you is a 50% annualized decline. But of course the economy is not going to be cut in half; 15% is quite a big decline, but it’s not 50%. And we’re talking about all economic activity in the United States. I think I scared you with that one.

Jim Lowell:
No, I think you reassured me with that one. I was just thinking about the other headlines that we’re seeing, that are talking about a groundswell of sort of the inevitable changing of the guard of value stocks, displacing growth stocks as investor favorites. And one of the headlines that I woke up to just this week, “Value stocks are staging a comeback.” And I’m thinking, this is another sort of classic example of how investors can be misled by headlines. I mean, we know that sometimes things are cheap for a reason, and that debate over whether or not value stocks are staging a comeback is or isn’t ageless. Decades ago, of course it was the rumor of growth stocks coming back after the 1960s collapse of those go-go growth stocks and in the 2000, it was the post-sock-puppet burst bubble that had investors hoping for a durable run-up in growth stocks.

Jim Lowell:
Well, value stocks were the steady sort of stable staples and value stocks historically, I guess you could say, were defined as companies with, let’s say real earnings, actual sales, material book value, sustained cash flow dividends. Well, I mean, flip that over the last two decades, but with particular regard to this last decade, not only have value stocks trailed growth stocks dramatically so much so that investors have taken any upturn in them as a sign of their inevitable return to dominance growth stocks, have delivered real earnings, actual sales, sustained cashflow, even dividends. So our way of thinking about that headline, we don’t bank on growth or value stocks coming back. We focus on managers who can help find the best value growth stocks and the most promising growing value companies to deliver a more nuanced approach to such generic labels. And we think there’s growth and value and value and growth in any marketplace. You just need to know how to bargain-shop.

Dan Wiener:
Yeah, I mean, this goes back, you know you’re hitting on one of my favorite topics, right? This whole, what defines a value stock or what defines a growth stock? When the index providers have a business and their business is [inaudible 00:17:27], either growth because it’s got a high rate of earnings growth and a low dividend yield or no dividend and maybe a very high price-to-book value versus the value stocks that they lumped together, because these are stocks with high dividend yields or low PEs or low price to book, whatever metric they like to use. But I always like to give the example of some of the managers that we invest with, who buy stocks that you might see the name and the portfolio and say, “Wow, that’s a growth stock. That’s a very high growth stock. I can’t believe that this manager owns that.”

Dan Wiener:
And then you find out that they bought it when the price was down 50% below where it is today when the doom and gloom was in the market. And to them, this looked like a quote-unquote “value, not a growth” stock. So, I much prefer working with and investing with managers who eschew the labels and simply look for good values at the right time in the market. And a lot of these managers that we invest with are looking for companies that are undervalued because investors don’t see some catalyst that is coming down the road, that will be a boom to their businesses. And I love the manager who says, “Here’s the catalyst, it’s not here yet, but we see it coming. It’s just a matter of time.” And meanwhile, we’re picking up dollars at 50 cents.

Jim Lowell:
Dan, as we conclude this conversation and speaking of catalyst, I think one type of headline fear-mongering we certainly expect to see more and more of is Election Day 2020. We saw one headline this week that said Election Day 2020 could be a catastrophic mess. And so I’m sure a lot of our clients are interested in whether or not we think it’s too early to try and think of ways to manage election-related risks. And I know we talk about this quite a bit, and we do think it’s too early to make any investment moves based on what we may or may not see transpire come November, but it’s not too early to begin to think of the ways in which elections will likely add volatility to the marketplace. And here we think about what might be, let’s say a sea change election in terms of party and policies, as well as market-related themes along the campaign trail, drug prices, trade war.

Jim Lowell:
Ultimately though, we don’t invest ahead of the facts and fundamentals and in our view, no matter how dramatic and dire the election headlines become no matter who is in charge, the markets inevitably settled down into the rhythm of what is, and isn’t working in terms of jobs in the economy and not just here but globally. So, I guess we could say, we’re kind of hopeful that a New Deal-like infrastructure plan could unfold in the years ahead creating a generational leap in terms of higher-paying trade jobs across the country. That would benefit everyone, but we’re not investing based upon assumptions of what’s going on in the political landscape.

Dan Wiener:
I mean, you only have to look back to the 2016 election and the shock that Wall Street went through when Donald Trump was elected president after everyone and their brother, for the most part, thought that it was going to be a Hillary Clinton win. And let me just give you a little tracker that I’ve been looking at as a means of suggesting that worrying about the election itself is a way to lose a lot of sleep and not know much about the market. If you measure from the time of the election to today, and you look at the performance of the stock market under Donald Trump, and you look at the same performance and over the same first, whatever it is, a thousand and some odd days under Barack Obama from election day, the market under Donald Trump from the day of the election has been about four or five percentage points better than the stock market did under Barack Obama over the same number of days.

Dan Wiener:
Fast forward to Inauguration Day and the thousand or some odd days from inauguration to today for Donald Trump versus Barack Obama. The stock market under Barack Obama well-outperformed the stock market under Donald Trump from Inauguration Day. So which one do you follow? Which one tells you the story? I’m not sure either of them does, as you said, we go back to what’s going on in the economy. What’s going on with corporate earnings, what’s going on with interest rates. That is what is going to drive stock prices, not the political party, nor the name of the person sitting in the White House.

Jim Lowell:
Nor are the headlines. And overall, as we turn to the start of summer, we know high anxiety over the viruses return a forthcoming election. Protest against discrimination will not only persist, but likely increase. And we know that our job is to stay calm, collected. As Dan said, focused on facts and fundamentals that impact your long-term objectives. So, while we certainly pay attention to the day-to-day headlines, we won’t be misled by them. Headlines do not dictate our long-standing and disciplined approach to helping you secure your financial future. We do. And on that headline note, this has been Jim Lowell.

Dan Wiener:
And I am Dan Wiener.

Jim Lowell:
From Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts. Your feedback really is always welcome. If you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com. Thank you for listening.