In a year filled with major news stories, the S&P 500 and other major US stock indices ended 2021 with very good returns.
A years’ worth of noise
Like many years in the recent past, 2021 was a year filled with news headlines. We seem to be bombarded with more news from around the world now and hear about it much sooner than ever before. The 24-hour news networks often fill any spare time with never ending commentary discussing the most controversial headlines.
The headlines of 2021 covered many topics from politics to inflation and Western fires to Covid 19 and its new variants. Chart 1 below illustrates many of the media headlines during the year along with the returns for the S&P 500.
When looking at the chart above, 2021 was a rewarding year for many investors through all the good and not so good news headlines. These are the results of some major US stock indices (all with dividends reinvested):
▪ the S&P 500 returned 28.7%,
▪ the NASDAQ returned 22.1%
▪ the Dow Jones Industrial Average returned 21.0% ▪ the small-cap Russell 3000 returned 25.7%.
In past newsletters and blogs, we have discussed how media coverage of current events often is meant to generate an emotional response to keep viewers tuned in. Last year was no exception. The media coverage of many of the headlines of 2021 were meant to evoke strong emotional responses from investors in particular. Stories of cryptocurrency, meme stocks, SPACs, and NFTs generate an emotion of “fear of missing out, FOMO.” Increased rates of inflation and the possibility of rising interest rates are covered by the media and analyst commentary generate anxiety about the economy. Coverage of potential economic impacts from a new President and changes in Congress generate very strong emotional responses, both positive and negative. The emotional responses of any of these stories can impact even the most experienced investors. These types of stories are just “noise” for long-term investors.
Noise for investors is made to sound like it will have an impact, but often, it turns out to be no more than a short-term event and soon forgotten. It makes investors think they need to time the market to avoid an upcoming downturn or take advantage of a perceived immediate opportunity before everyone else finds out about it.
The best filter for the noise generated by the media is a balanced and diversified portfolio based on an investors risk as part of a sound investment plan that can be followed through the market’s ups and downs.
At Prato Capital, we like to tell our clients to “Tune Out the Noise” and keep the focus on the long-term. This is advice any long-term investor would find beneficial.