I RECENTLY WROTE about the market indicators I pay attention to. As a long-term, buy-and-hold investor focused on gradually building wealth, I downplay the importance of day-to-day market gyrations. Nevertheless, I can’t deny my fascination with charts and big market moves.
Back in college, I used to watch CNBC all the time. Now, I rarely have it on. The talking heads are constantly discussing matters that I believe are distractions. There’s a set of indicators that make headlines and are great fodder for financial journalists, but don’t mean much for investors. Here are five headline-grabbers that you can safely disregard:
The Fed. When it’s “Fed Day,” the major financial news networks don’t discuss anything else, or so it seems. The announcement finally comes in the afternoon—and the market reacts. Then the market reacts to the reaction. By the 4 pm ET close of trading, stocks and bonds may have had huge moves in both directions. What initially seemed like a “bullish” announcement often turns into a bearish reaction, and vice versa. It’s utterly unpredictable. Then, within a few days, everyone has moved on to some other topic.
On Fed Day, you’ll find me on the golf course.
The Dow. The Dow Jones Industrial Average has been around for more than a century. Everybody has heard of it. It’s a price-weighted index, meaning the stock with the highest price per share gets the biggest weight. Today, that stock is (drumroll, please) Apple. Apple’s 10% weight is only due to its $385 share price. Pfizer is the tiniest part of the Dow with a 1% weighting, since it’s just $36 per share.
What’s my go-to? I look at the S&P 500, which is “cap-weighted,” meaning the importance of a company in the index depends on its total stock market value. If I really want to get into the weeds, I see what’s happening with the S&P 500 “equal-weight” index, which is a better gauge of how the typical stock is performing.
The news. There’s a headline for everything. During 2019, how often did we hear “stocks rally on trade deal optimism”? Then, the very next day, we’d read “stocks fall on trade talk jitters.” The same goes in 2020 regarding COVID-19. In the financial media, stock market prices drive the narrative—and that narrative supposedly explains the behavior of all investors.
When I check out the newspaper or “Finance Twitter,” I look for cool charts and visuals, not the headlines.
Small caps vs. large caps. Analysts like to say that when smaller companies are outperforming large-cap stocks, it’s a sign that investors have a healthy appetite for risk, so the stock market should head higher. The problem: There’s little empirical evidence to support this idea.
That 1% of your portfolio. Maybe this last one is more applicable to us long-term investors. I’ve found that many investors are like me, with a bias away from simplicity. Perhaps it’s FOMO, or fear of missing out: We want to own a little bit of everything, just so we can say we got a piece of some big market move.
But in truth, a 1% position in just about anything won’t make a big difference. Sure, it could be the next bitcoin, going from $10 to $19,000—before falling below $10,000—but that’s unlikely. Instead of FOMO, try KISS, or keep it simple, stupid. Diversification is great, but don’t overdo it.
Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Reading the Signs, Inflection Point and Getting Back In. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com.