Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
Keep News in Perspective
09/11/2002 12:00 am EST
David Brinkley once said, “The one function that TV news performs very well is that when there is no news we give it to you with the same emphasis as if there were.” Yes, there’s plenty of reasons for the media and investors to be pessimistic, as we approach the September 11th anniversary, face potential war with Iraq, and operate within a market environment focused on corporate misdeeds. The media also continues to emphasize September’s historically poor record. Does this mean you should sit on the sidelines?
Watching the news in recent weeks has provided investors with numerous guarantees: September will be a down month; Iraqi tensions will cause oil to soar; terrorism fears will push gold higher; corporate mistrust will keep investors on the sidelines. All or some of these forecasts may come to pass. But don't for a minute believe that the media has any basis for its forecasts beyond the fact they they are currently popular views. In fact, the media, as a reflection of currently held opinion, will more than likely be wrong. The media is constantly looking for a way to add rhyme and reason to the often-illogical nature of the market. It rarely succeeds.
Yes, September has historically proven to be the worst month to invest. However, what is underplayed in this headline-grabbing announcement is that the average historical monthly decline was a mere 0.4%–-and that the market had already declined well more than 0.4% in just the first trading hour of September. I have watched financial news in one form or another almost every day for two decades. Every day, a number of things happen that impact the business world. And every day, the markets either rise or fall. And every day, the media is forced to explain the day’s rise or fall based on the events that occurred during that day. Actually knowing why the markets did what they did on any one day is impossible. No one–-not Warren Buffett, George Bush, Alan Greenspan, or Lou Dobbs–-know why the market may be up or down yesterday, today, or tomorrow, or even next week or next month. Like everyone, the media can assess all the latest business news and try to find a logical correlation between market prices and news events.
But the correlation is tentative at best. Let’s say the Federal Reserve raises interest rates. If the market falls, the explanation is that investors are concerned about a weak economy and they are worried that higher rates will choke off consumer spending and corporate borrowing. If on the other hand the market rises, the same news event will be used to explain that the Fed’s decision to raise rates is a positive signal that the economy is on the rebound, which bodes well for corporate profits. If the market merely moves sideways, the explanation is that the market had anticipated the Fed’s action.
If I can tell you any one fact after following the financial news for two decades it is that there is virtually no correlation between good and bad news and the subsequent reaction that a stock or the overall market will have to that news. Good news regarding a stock does not imply–-with any greater than 50-50 accuracy–-that the stock will react positively. Likewise, bad news has no greater correlation with a negative reaction in the stock price. Obviously, unexpected news can have a drastic impact on a stock. And whatever the stock does, the media will find an explanation for the move. A bankruptcy can see a stock drop, because conservative holders sold, or the same bankruptcy filing can see a jump in price as the “bad news” is now out of the way. Even something as drastic as the unexpected death of a CEO could see the stock plunge as the market focuses on the lost value of the visionary CEO, or surge as the market focuses on the possibility of a takeover due to the CEO’s large stake in the company that may now become available.
How many times have you heard, “the news was already built into the stock….”? There is no possible news event for which the media, in retrospect, cannot find an explanation for both a positive and negative reaction to that event. Dick Davis, my mentor in the 1980s, used to say, “Because the media fosters the myth that whatever happens to a stock or the market on a particular day is linked to news, there is the perception that the market followed the news. Actually, it’s the other way around. The market is the leader and the news follows. There is always good and bad news on a stock. Let’s imagine the good news is listed in Column A and the bad news in Column B. If the stock goes up, we use Column A to explain the move; if it goes down, we go to Column B.”
Even more misleading to investors is that news requires newscasters to continually justify and explain market movements that often have no correlation with the news. Indeed, so many variables combine to impact the direction of the market, that it is often foolhardy to try and pin the market's action on any specific news event.
Meanwhile, being instantly and totally informed about stocks can also prove to be a negative, as it forces long-term investors to make too many emotional decisions. Does today's unemployment report or yesterday's purchasing manager's index really impact your well-thought-out long-term investment positions? Most likely not. Long-established trends in individual stocks and in the market in general are not easily reversed. Dick adds, “Most news, as sensational as it sounds at the time, does not involve basic fundamental change. It simply is not as bad or as good as it sounds at the time the news is released. News in the media strives for immediacy. The goal is to instantly inform. But it is the passage of time that puts news into its proper perspective.”
And perhaps no event requires more perspective than the anniversary of the September 11th tragedy. While many focus on the sorrow of this occasion, I would prefer to focus on the pride that we should take in having survived through such an emotionally difficult year. Will the memories from this anniversary keep investors on the sidelines? Or will the passage of this anniversary lead to a relief rally?
We won’t know until after the fact. If the market heads south, we will continue to hear about the poor performance of September. If, however, the market surprises to the upside, the media will focus on the seasonally favorable mid-year election cycle, which also begins in September and runs through the November elections. Or the media could focus on the trader's adage to buy on Rosh Hashanah and sell on Yom Kippur. And don't forget, we will soon be hearing about October's role in ending bear markets (more bear markets have ended in October than in any other month). The only thing we can be assured of is that the media will have a handy explanation no matter what market action unfolds.
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