When headlines move markets, doing nothing can be the hardest trade

Yet some of the most difficult investment decisions I've faced have come during periods when markets were reacting to headlines rather than data.

Working through events such as Donald Trump's election, US-Iran tensions, and periods of political uncertainty in the UK and France, taught me the real challenge is deciding which headline deserves a response.

Lately, I have been thinking about social media and the market-moving headlines it can create. In a period of heightened geopolitical uncertainty, this form of communication has become more common and influential.

Historically, major policy shifts were communicated through carefully prepared statements, scheduled press conferences and official guidance. Today, markets can move within seconds of a social media post or comment appearing online.

For me, the hard question is not whether headlines move prices. They clearly do. The big question is when a headline is information, when it is noise, and when doing nothing is the most active decision available.

When to lean against the move

Sometimes the market overreacts.

Periods of uncertainty can force investors to reduce risk quickly, especially when leveraged investors, hedge funds and systematic strategies amplify the initial move.

As a long-term investor, those moments can create opportunities to stand against the prevailing narrative, but only if the fundamental case is still intact.

Standing against a market driven by headlines can be uncomfortable, even when fundamentals suggest the move has gone too far.

When to lean into the move

Overreactions happen, but not every headline move should be faded.

Markets often react before economists or policymakers have fully incorporated new information into their forecasts and such momentum can matter just as much as valuation.

I may not know exactly how events will evolve, but I can still judge whether positioning, liquidity and momentum are pointing in the same direction. In those moments, supporting the move can be the right decision, even before the economic impact is clear.

The lesson here is that prices can change before fundamentals do. Waiting for complete clarity is not always an option.

When doing nothing is the active decision

This is often the hardest choice.

Portfolio managers are often pushed to react. Every fresh headline can look urgent in the moment, then disappear into market noise a few days later.

Energy moves offer a useful example. Sharp moves in oil and natural gas prices generate concerns around inflation, growth and monetary policy. Rates markets can be highly sensitive to these shifts, with the yields of short-dated bonds and yield-curve dynamics reacting swiftly to changing headlines.

While some shocks become economically meaningful, many prove temporary. Investors who respond to every swing in sentiment risk allowing short-term volatility to dictate long-term portfolio decisions.

In these situations, doing nothing can be an active decision. The stronger the underlying investment rationale, the easier it becomes to tolerate short-term market turbulence.

Conviction is not stubbornness

The real decision is rarely whether one headline matters. It is how much weight to give that headline against valuation, positioning, liquidity and the original investment case.

Headline-driven volatility is unlikely to disappear. Neither are the opportunities it can create.

If anything, recent trends suggest that we should expect more.

The question I keep coming back to is this: when the headline is loud, but the thesis is still intact, do I have the discipline to do nothing?

Important information

The information contained herein is current at the time of distribution, intended to be of general interest only and does not constitute legal or tax advice. Aberdeen does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Aberdeen reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice.

Some of the information in this document may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations as he/she may consider necessary or appropriate for the purpose of such assessment.

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