Not So Breaking News

Story Highlights:

• Reviewing headlines in 2011 thus far has been a near-constant rehash of stories.
• While that’s been the case, the economy is chugging along fine, and the stock market is basically flat.
• Looking forward, most of the commonly discussed headlines of the day likely stay with us, but they’ve lost a meaningful ingredient—surprise power.

Greece and European sovereign debt. Japan and its disasters. Unrest in the Middle East. High unemployment. US debt and the debt ceiling. Fears of who’s in office (or who will be in office a year from now). Inflation and monetary policy. Housing. Oil.

Those are some of the major issues frequently cited as economic negatives today—each taking their turn earning boldface, size 48-font on the front page of newspapers or websites. But these perceived risks aren’t exactly hidden away, waiting to spring suddenly on anyone. Nearly every professional economic forecasting body (and even more non-professionals)—from the IMF to Ben Bernanke, Moody’s to Fitch, analyst to pundit and talk-radio host to television reporter—has at least mentioned them, with varying degrees of emphasis. Lately, Greeceand its ongoing debt woes have taken the pole position (which we’ve addressed here, hereand here.) But they’ve all flip-flopped in popularity.

Let’s take a cursory review of what’s actually happened economically in 2011, while all of the above have received so much attention:

• US and world GDPare growing, and at all-time highs.
• US inflation, while it’s increased (doing away with last year’s deflation fears), is tame.
• Emerging Markets economies continue to grow quickly, bringing increased demand for goods and services from the developed world.
• Not coincidentally, US exports have logged new highs in 2011.
• Corporate profit growth is robust and broad-based.
• Interest rates on US federal government debt remain very low, with the 10-year yielding about 2.9%as of this writing.
• While some bemoan 2011 as a bad year for stocks, US and global indexes are basically flat thus far.

We often write about the decisions of leaders and business people and their likely rationale (or lack thereof—politicians!). Understanding a range of rationales—reasons—helps us better understand what decisions may be made, and how they likely impact the economy and capital markets—whether on a major macro or mini micro level. But that stretches to individual investors as well—you all have choices to make that should be underpinned with reasons.

Reason implies the use of reasoning—thinking through an event or decision to its likely logical conclusion, not allowing fear or greed to run your decision making. Was it possible any of the above could have caused a new recession? Some, yes (e.g., a sudden, disorderly blowup of the euro). Others, no. (For example, unemployment, which is a symptom of previous economic weakness, typically improving at a lag after economic recovery begins.) However, did any of these actually kick off a new recession? No. And are they likely to in the immediate future? Absent a material new driver, probably not, given we’ve already grown through them all.

Looking forward, let’s be clear: No item on our list of widely known negatives above is likely to immediately vanish from headlines. Greece, oil prices, housing, inflation, etc., are all likely stories with staying power—simply rotating which is the lead story and which on page E7. For example, would anyone be surprised if Greece’s Socialist-led government missed some future austerity hurdle in privatizing their economy? Well no, seeing as they are, in fact, socialists.That these forces are so widely known means their risks (again—as things stand currently) are all well understood and digested by the market. They’ve lost surprise power—an important ingredient in materially moving markets longer term.

Unless you’re in media, you don’t get to decide what news is up front—but you do choose what to focus on. We’re not arguing one should disregard all these items—quite the opposite, as events continually change. But it’s widely accepted that what moves markets—past very near-term, near-unpredictable wiggles—isn’t what everyone is focusing on, but the fundamental material thing (or things) few expect. So a primary risk to investors is actually making decisions based on overemphasizing something old or misinterpreted.

If you’re focused exclusively on major headline items—and things that have been major headline items for some time—instead of asking, “How will this slight alteration in an old story impact stocks?”, ask, “What material things am I missing by choosing to focus on what everyone else is fretting?”