The Sequester and Other “Calamities.”
The stock market’s response to the “sequester”—Washington’s $85 billion in annual spending cuts that took effect March 1st—wasn’t what many expected.
After the nation’s leaders failed to reach a budget deal to avert the painful budget cuts, the market, many assumed, would have fallen like a rock. Instead, it didn’t do much of anything; investors basically shrugged. Then a few days later, with signs that the economy was strengthening, investors pushed the Dow Jones Industrial Average to an all-time high.
This unexpected reaction to Washington’s latest budget drama is noteworthy for what didn’t happen.
Remember the debt-ceiling fight in the summer of 2011? Panicky investors sold in droves, sending stocks down nearly 20%. Then at the end of 2012, in the midst of the fiscal cliff showdown, they panicked again, pulling the S&P 500 index down 7%.
This time around, the political battle was intense, and now severe budget cuts have begun. Yet investors didn’t panic as they had in previous episodes. Why? My hope is that they’ve learned a lesson over the past couple of years: Panicking simply doesn’t pay.
After both the debt-ceiling and fiscal-cliff showdowns ended in agreements, the stock market leaped forward. Those who had jumped to the sidelines found themselves playing catch-up. This was unfortunate, but not surprising. History has shown again and again that there’s no better way to lose money than to jump in and out of the market based on the daily headlines.
Yet the past couple of weeks have shown that maybe investors are tuning out the hype in the media. It’s too early to be sure; investors’ nerves will be tested again as our divided leaders fight more budget battles. Volatility will not go away.
My hope is that you look beyond the news of the moment and remember the larger picture. Successful investing is about carefully constructing a plan, and then applying patience and discipline.
The best investors have always trusted that over time, the engine of free-market capitalism will pull the economy forward. As it does, companies grow in value, and those who own a stake in them directly, or in the Fidelity mutual funds that own them, will reap the rewards.