Over the last week, it seemed like all the mainstream media could talk about was the doomsday Chinese spy balloon.
It’s true, an unwanted incursion by a foreign adversary isn’t a laughing matter…
But at the end of the day, I can’t believe the U.S. military – which has classified tech capabilities like something from a sci-fi movie – felt an immediate threat from a balloon floating at 60,000 feet.
And yet, a quick look at any social media platform showed people were frazzled.
In short, the media got its desired response: fear.
And I know there will be countless more boogeymen on the horizon it’ll use to drive viewership. So it’s wise to stay alert…
Remember, these outlets make money by selling advertisements. Meaning they’re not opposed to distorting reality if that’s what it takes to captivate audiences.
In the coming months, I expect to see the media latch on to a new fear-mongering tactic. This time, it’ll involve the ongoing debt in Congress, the government hitting its debt ceiling and shutting down, and the United States potentially defaulting on its debts.
So before that occurs, I’m writing to you today to show you – using data, not speculation – why I’m not worried about a debt-ceiling-related market crash. I’ll share what actually has happened in the markets when the government faces its debt problems and there’s a shutdown.
By making yourself aware of the facts, you’ll be able to resist a mistake many investors make… and protect your finances while others panic.
Don’t Fall Prey to Irrational Emotions
Mastering your fear is one of the keys to making rational decisions. And that’s especially true when it comes to investing.
But blind exuberance isn’t the way to go, either. That’s what leads to bubbles.
So you need a healthy balance. And be able to tell the difference between a rational move in the markets and one that’s fueled by fear or exuberance.
So far this year, we’ve seen an impressive rally in the markets. The S&P 500 rose by 7.2%, and the Nasdaq soared even higher, up by 14.2%.
But I believe this positive trajectory is both reasonable and sustainable – and not driven by irrational emotions. That’s because this appears to be mean reversion after a year where the market was highly pessimistic.
Note that even after 2023’s strong year-to-date rallies, the broader markets are still negative over the past 12 months. The S&P 500 is still down 8.3%… and the Nasdaq is down 14.3%.
Now, whether we go up or down from here is hard to say… That’s because markets move on headlines in the short term. But over the long term, it’s the fundamentals that support share prices.
These cover operational results like sales, net income, and free cash flow. And as a value investor, I’m always looking for discrepancies between share prices and fair value estimates, backed by fundamentals.
By focusing on this margin of safety – and not the latest sensational headline the mainstream media is pushing – I’m able to capitalize on irrational mispricing in the market.
Here’s what the fundamentals are reporting for the kinds of blue-chip stocks we track at Wide Moat Research…
Through the Q4 earnings season, most have posted revenue and earnings growth. And most S&P 500 companies are expected to post low- to mid-single digit earnings-per-share (EPS) growth.
That gives me confidence this bounce isn‘t a fluke. And that now is the time to look past the headlines whose only job is to kick up fear and focus on the hard data.
Stocks Rally During Government Shutdowns
I believe that’s what all this conversation about debt ceilings and shutdowns is – kicking up fear.
Sure, if the U.S. government defaults on its debt, I’m sure we’d see a massive sell-off. The global financial system relies on the U.S. dollar as reserve currency. So a debt default and lower credit rating for the U.S. government would disrupt this system.
But leaders in Congress understand this (even if they’re not willing to say it publicly). So I don’t believe any political party would want to see this happen.
Instead of speculating on a political outcome, let’s look at past data. That shows how the market has performed through similar periods of uncertainty.
While today’s scenario is not a perfect apples-to-apples comparison to any of the previous debt ceiling debate periods… Overall, I find it encouraging that the stock market has largely overlooked these political rollercoasters.
You see, the S&P 500 has actually trended higher through each of the last six government shutdown periods.
Source: Morningstar Direct
And when you look at the week leading up to the shutdown/credit crisis announcement – which is a period typically rank with fear – the market’s trend is still overwhelmingly positive.
Source: Morningstar Direct
Now that you know the facts, you can cut through the mainstream fearmongering.
So the next time someone at a cocktail party brings up the government shutdown, selling their stocks, and running for the hills, you can set them straight…
And even more importantly, you’ll be able to sleep well at night, even as the media and political discourse attempt to spread fear.
Success in the markets comes to those who are able to control their emotions, overcome fearful and greedy inclinations, and stay the course.
By following the fundamentals, we can stay afloat through it all.
The blue-chip equities we track have trended higher for over 100 years. And I don’t see that long-term trajectory changing anytime soon.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
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Source: Wide Moat Research