Buy? Sell? Buy? Sell?

With headlines related to the economy and COVID-19 news coming so quickly, it makes for difficult short- term investment conditions. This challenging environment leads to questions about the best way to invest assets.

• When is it a clear time to buy or sell? 
• When should you be optimistic or pessimistic? 
• How do I invest when market sentiment shifts so quickly?

That’s the puzzle that is discussed daily on business TV and these are the questions I am most often asked.

Sentiment Swings

When markets are highly volatile, sentiment levels rise so that one’s reaction to positive and negative news is magnified. This tends to result in investors making decisions based on excess emotion, so-called hunches, and short-term market swings. Short term speculation is a very tough game to play as markets, as I’ve mentioned many times, are not wholly rational.

Just think over the last several weeks how the market has gone from negative to positive based on a given daily headline. Just when you think the news headlines are permanently negative, a new headline arises causing the market to rise. Likewise, when the all clear signal finally appears in view, another headline arises that dashes those hopes. So confusing!

See the chart below. This is the definition of volatility!!!!!

 Source: https://www.cnbc.com/2020/04/08/stock-market-futures-open-to-close-news.html

Emotion, Fact, and Fundamental Analysis

I’m often asked why markets sometimes will move in the opposite direction of headlines. Recently, unemployment statistics suggested that the economy was plunging towards a recession. On that day, market sentiment shifted upward. Why? Because the expected unemployment news, while horrible, was not as bad as many thought it might be. Expecting that markets will always behave rationally is a mistake investors make on a consistent basis.

This is why having a longer-term perspective rooted in fundamental analysis tends to be the right strategy for most investors. Fundamental analysis analyzes the cash flows of equities to determine what the likely long-term price might be if cash flow estimates are accurate. This is the philosophy that fundamental investors have used for decades. We use this strategy as does Warren Buffett. It’s the philosophy we believe gives you the highest probability of success. You can learn more here about this research technique. https://www.investopedia.com/terms/f/fundamentalanalysis.asp 

Short-Term Sentiment Changes Rapidly

As a reminder to how fast sentiment can change, it might be helpful to analyze one particularly difficult downturn, the dot com bubble. The chart below shows the price movement of the Dow Jones Industrial Average during that time frame. The chart below also includes a series of arrows when the market was rising or falling representing optimism and pessimism. Green is positive sentiment. Red is negative sentiment.

Source: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart  

Notice how fast sentiment can change. If one believed these short-term pivots, it would end up providing a confusing map for how to invest. Markets by default are MOODY and that mood is impact by daily headlines.

DWM Process Designed for Your Goals

The next time you see the market fluctuate and shift directions on a moment’s notice, think back to the chart above as a reminder about how difficult it is to predict the short-term.  When DWM invests, sentiment is a part of the decision input, but we more so focus on fundamental analysis. This combined with economic analysis and examination of industries that will benefit from tailwind conditions (as well as industries that will be buffeted by headwinds), we believe gives you the best opportunity for success.

If you’d like more details about information contained in this week’s update, please let us know. And as always, if you would like to personally communicate with me, simply reply to this email and I will respond to you myself.

Be safe everyone. Take care and be healthy.