Worst Day of the Year Make You Queasy?

The financial news screamed that the “Dow” dropped 800 points in giant letters. It was the worst day of the year for stocks, and some people may be feeling a bit seasick. We’ve discussed it before, but discomfort is natural. It’s hard to overcome when the news seems so terrible.

But, it may be shocking to hear the headlines are misinforming readers. Here’s a clip from yesterday’s WSJ.com main page.

Dow Sheds 800 in Biggest Drop of Year. Bond Rally Drives 30-Year Yield to Record Low
2019-08-14 Wall Street Journal headline of Worst Day of Year

To WSJ’s credit, this is one of the better sets of headlines. Notice the bullet point, “Bond Rally Drives 30-Year Yield to Record Low.”  Normally they leave out “Rally” and give an impression the bond market was panicking too as yields collapse. However, when bond yields fall, as they did today, prices go up and investors make money.

Worst Day of the Year, Bonds Soar

Today was a spectacular day for long-term government bonds. Take a look at the chart below. A long-term government bond ETF (VGLT) is shown in light blue, while an S&P 500 ETF is shown in dark blue. Notice how the bonds and stocks seem to go in opposite directions in many cases?

There are several interesting points. For example, despite the headlines, stocks are down only about 1.4% from eight days ago. In fact, the ETF closed about where it closed at the end of Monday, the 5th. Also, note that over this period, this bond fund gained almost four times as much as the stock fund declined. Which website, newspaper, or cable news channel told you the great news in the bond market? Worst day of the year, my ascent.

Chart showing the behavior of an S&P 500 ETF compared to a long-term government bond ETF.  When stocks go down, it appears bonds go up, and vice versa.  They are almost flipped images of each other.

The News Demonstrates Its Lack of Value

Over the last eight days, stocks have done almost nothing, and yet the media want to terrify investors. There probably isn’t a worse way to inform oneself about financial matters than the news. In fact, you’re likely better informed if you never look at the news.

More importantly, even if the news was accurate, it should have no bearing on what you should do tomorrow. News is not data, it’s emotions, as Dr. Markman and Dr. Duke explain.

The news tends to focus on the negative … because negative events are much more salient for us.… To the extent that news producers are trying to cater to the viewers, they are going to focus more on stories … that create some threat.

Dr. Art Markman and Dr. Bob Duke, Two Guys on Your Head, 24-Hour News Cycle

Here are some ideas that may help you when the market drops.

Be Disciplined, Grasshopper

First, make sure your investments match your time horizon and risk tolerance. This is a bit involved, but you can read more here. Simply put, the money that is needed soon should not be heavily invested in stocks, but placed mostly in bonds or cash instead. With the bond market returns being so good, the value of your short-term investments may exceed your goals.

Another consideration is that time eats volatility. It’s that simple. The more time you have, the less this type of volatility matters. But the trick is sticking to a long-term strategy and letting time do its magic. It’s best to ignore the market vagaries.

This stance requires disciplined neglect. Leave it alone! Stop scratching that! It’s time to get in touch with your inner sloth, and turn off, tune out, and drop that cable news subscription.

Meditating Sloth

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