When the recent political debate over the U.S. debt ceiling reached a fever pitch, commentators and observers opined about what effect the worst possible outcome, default, would have on the U.S. economy. Most painted apocalyptic scenarios that, while dire in outlook, were actually not likely to happen, and it did not. In the wake of a deal, many began to talk about the possibility of a downgrade in the U.S. credit rating on long-term debt.
Credit rating agencies Moody’s and Fitch maintained the U.S.’s AAA rating, but the markets were stunned when, after market close on a Friday afternoon Standard & Poor’s downgraded the U.S. to a AA+ level, an unprecedented move. The following Monday morning came the drop. It was at this point that most analysts predicted a hike in interest rates and that bond prices would go up along with them. Instead, people rushed to sell and unload their stocks and went right into the bond market to buy treasuries.
Noise is the result of talking heads in the media chattering away and sensationalizing what are usually the worst outcomes to a particular crisis, and in the case of the debt ceiling standoff and the subsequent market volatility, there has been plenty of noise. News, on the other hand, is facts, un-debatable and open to little if any interpretation. It might be harder to get your eye and your attention on the news when so much noise is out there, but that would be the wise tactic for anyone with investments and money in the markets.
Someone who heard only the noise of the past few weeks would respond quickly and erratically to what they heard in the media, and by selling off anything they thought was a risk to hold. Those who have a careful ear and listen to the news are not only better informed but also better prepared to make sound and sensible financial decisions in the face of volatility and unpredictable market pressures.
In financial matters, as in most other things, reacting quickly reflexively is not often wise and can have negative consequences for your long-term outlook. For those who invest and have a stake in this economy, always be sure to consider the big picture, take a deep breath and take a more circumspect perspective. Those who keep their eyes on the long-term prize and do not give in to short-term pressure or headlines about the markets fluctuations will ride out the uncertainty far better than others will.
Larry Palmer is a Managing Director with Morgan Stanley Private Wealth Management in Los Angeles.