It goes without saying that the media dominate the discussion.

In rational markets, investors would read each story behind every headline. However, in today’s market, there are far too many that trade on the headline and stop to read the story later (if at all).

History shows that this spontaneity is far from a profitable endeavour. These headlines followed sessions that accompanied noteworthy market uncertainty:

  • October 30, 1929 (following Black Tuesday): “Stock Prices Crash in Frantic Selling” – The Washington Post
  • October 19, 1987: after the Dow fell 22.6% in one day, CNN opened its news broadcast stating: “There’s only one word to describe what’s happening and that is ‘panic’”
  • September 15, 2008 (the day Lehman Brothers filed for bankruptcy): “Wall St.’s Turmoil Sends Stocks Reeling” – The New York Times
  • March 9, 2009 (the day the market bottomed): “New Fears as Credit Market Tightens Up” – Wall Street Journal

While all of these headlines were factually correct, and as scary as each one sounds, in all but the first instance, the market had already priced in the doom and gloom that the audience feared most about the future.

3 years later, the Dow returned the following:

  • October 30, 1929-1932: -76%
  • October 19, 1987-1990: +45%
  • September 15, 2008-2011: +15%
  • March 9, 2009-2012: +97%

Recall that during the early 1930s, Keynesianism/macroeconomics had not yet been invented. Following FDR’s adoption of a “new deal” between 1933 and 1936 whereby government infrastructure projects were developed and other means were used to increase income for the unemployed in order to escape the Great Depression, economic growth resumed again.

While it is impossible to predict where the market will be this time next year, if there is a guide then it should be rooted in history. The headlines that appear on the front page of the newspapers explain the past but undoubtedly have a lousy record at predicting the future.