August 18, 2017 in Investing

Will the solar eclipse mean a dark day for stocks?

When a solar eclipse thrusts parts of the U.S. into darkness on Monday, will the stock market get spooked?

If that seems like a ridiculous question, you must have missed headlines like these:

Apparently, all it takes is one less-than-ideal development or comment to topple the entire stock market.

So, what about when day quickly and ominously turns to night?

What’s behind those headlines

Well first, here’s what you need to know about those “Stocks drop” headlines. Basically, professionals try to make sense of the vast interconnected world of demand for publicly traded companies using squishy language.

Stocks went up, and this other newsy thing with a positive connotation occurred, so they might be related. This isn’t some nefarious conspiracy or con job, but rather an attempt by experts to find an explanation for why equities move one way or another.

Still, if experts can diagnose the ups and downs of major companies and indexes on a given day, you’d expect they’d do a better job predicting where stocks will go in the future. Most actively managed funds – where a portfolio manager, or a team of them, selects stocks – underperform their relative benchmarks and then charge high fees.

Even those geniuses who do consistently outperform the market, such as Warren Buffett, recommend everyday Americans put their money in diversified low-cost passively managed funds that track a big index, like the S&P 500.

Is there a way to know where the market will go?

You’re better off being a bit humbler when it comes to trying to understand why investments are moving in a certain direction. You might just save yourself a lot of money.

Take the so-called Trump Bump. Stocks rose around 19 percent since President Donald Trump’s election, albeit with twists and turns along the way. And the president’s words do affect stock prices.

Complete Republican control of the federal government, and the promise of lower taxes, $1 trillion in infrastructure spending and looser regulations, led some analysts to believe there would be the type of fiscal spending that can push up stock prices.

Stocks started to slide, though, around the spring as the U.S. House struggled to pass a health care bill, a historic bomb was dropped on Afghanistan and Trump fired former FBI director James Comey.

Then, the market rebounded — only to struggle again in recent days.

Why stocks do what they do

There are a lot of reasons. Are all of them correct? A few? Who knows?

One academic paper found that stocks rise in countries across the world on sunnier days. If there are clear skies in Shanghai, buy!

Or you might win by playing the alphabet game. One fun example? Companies with stock tickers starting with the letters in Warren Buffett’s first name beat the market by 12 percentage points annually from 1994 to 2013. Who needs the Oracle when you can just use his name?

OK, but what does this have to do with the total solar eclipse?

The continental U.S. hasn’t seen a total solar eclipse since Feb. 26, 1979, and on that day the S&P 500 went down 0.11 percent. Meh.

More recently, the last total solar eclipse to cross North America occurred Aug. 1, 2008, and the S&P 500 fell 0.6 percent, according to Morningstar. More meh.

You’d probably scoff at a story that read, “Stocks took a slight dip today as the moon completely covered the sun over the upper regions of Canada.” That seems silly on its face. And it probably is.

But you should flash that same skepticism when narratives arise about why stocks went up or down, and especially about where they’ll go in the future. You can easily fall into a conditional trap (“if Trump signs a tax reform bill, stocks will rise”) that plays into your own hidden bias.

So what should you do?

Don’t deviate from your long-term investing plan just because you think you see the stars — or, more precisely, the sun and moon — aligning.