Bob Homan: Turmoil on stock market does not necessarily mean more action
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
In times of constant news about war, volatility and other calamities, ‘doing nothing’ almost seems like an act of courage. But sometimes that is exactly what is needed.
When financial markets are turbulent – or rather, when share prices fall – I often hear people say that my colleagues and I must be particularly busy. In recent weeks, since the attack on Iran, it has been no different. Yet, on balance, we are not busier than usual. Whilst it is true that in uncertain times investors are looking for guidance and clarity, and our communications department is working a little harder, when it comes to buying and selling we are actually less active.
This is not indecision, but caution. Bond yields, share prices and commodity prices are currently fluctuating so wildly that what seems a sensible decision one day could cost money the next. Market sentiment is closely linked to the course of the war and the supply of oil. With a mercurial figure like President Trump in the lead role, that course is difficult to predict. In such an environment, the best course of action is to sit tight.
Scenarios offer guidance, but rarely direction
Yet many asset managers venture into making predictions and present a series of scenarios regarding the course of the war and its consequences for the markets. Usually there are three. One scenario assumes a swift conclusion, one scenario anticipates a long war, and one scenario expects a medium-term course. Generally speaking, these are well-thought-out narratives that certainly make sense. Yet they are of little use to investors. The consequences for financial markets of the short- and long-term scenarios are diametrically opposed, and none of the authors clearly takes sides. How could they do otherwise?
The constant flow of information does not make forecasting any easier
In a world where a virtually unlimited flow of information is constantly available, it is becoming increasingly difficult for people to interpret that information. In that respect, I have bad news for investors. Despite the enormous amount of data, the use of artificial intelligence and seemingly convincing scenarios, predicting tomorrow’s and the day after tomorrow’s prices is certainly not getting any easier.
The real challenge for investors is therefore to stick to the long-term plan amidst all the analyses and opinions. At the same time, the abundance of data and scenarios increases the pressure to take a stance quickly: for or against a particular scenario, for or against a specific market path. That need for direction is understandable, but can be misleading when the underlying uncertainty is too great. In such an environment, caution is not a sign of indecision, but of discipline.
Not every crisis warrants a definitive judgement
Not every crisis warrants a definitive judgement, and certainly not every scenario exercise yields useful insights. Sometimes it is analytically sounder to conclude that the possible outcomes vary too widely to draw a clear-cut conclusion. This applies in particular to geopolitical conflicts, whose economic effects often prove more erratic and less linear than initial market reactions suggest.
Perhaps that is the most important lesson for investors. In times of war and unrest, the number of scenarios and opinions grows faster than the number of facts. Ensure you do not take sides too quickly, remain deliberately patient and stick to the long-term plan. That may not yield spectacular results, but it will provide a more relevant and consistent narrative.
