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Prepare for an "Age of Anxiety"
10/10/2019 9:08 am EST
While “The Magazine Cover Indicator,” has been a reliable fade, even a broken clock is right twice a day. Landon Whaley explains.
Headline risks are everywhere, much like “buy” ratings from Wall Street analysts. As an investor, it’s best not to get drawn into well-written narratives that promise to unveil the mystery of financial markets. This week’s “Headline Risk” comes courtesy of the Old Institution and their predilection to highlight a market theme after the move is over.
A recent cover of The Economist titled “Markets in an Age of Anxiety” reminded of a study done by a couple of analysts from Citibank several years back that evaluated the “Magazine Cover Indicator.” Many people (including yours truly) believe that when an asset class, financial story or other market-based theme hits the cover of a prominent publication, the best days of that theme or trend are behind it.
To evaluate this magazine indicator, the analysts assessed covers of The Economist from 1998 through 2016 that were related to “an emotional or hyperbolic portrayal of an asset class or market-related theme.”
They assessed each cover for three different criteria: 1. Does the cover clearly reference a market theme or asset class? 2. Can an obvious contrarian trade be justified by this cover? And 3. Does the cover unequivocally make a strong statement on direction? (i.e., does it have a strong bullish or bearish message?) They found 44 covers that checked all three boxes over those 20 years.
They then tracked the performance of the asset class referenced over the next three, six, and 12 months. The three- and six-month performance was a jump ball; the results were murky at best. However, they found that in the asset classes covered; the trends tended to reverse themselves between six and 12 months after publication; 68% of those 44 covers were wrong after 12 months. Any strategy or indicator that is accurate 7 out of 10 times is worth a further look!
This isn’t just a historical issue; last year, The Economist released an issue on Jan. 18 entitled “The New Titans.” The cover was highlighting the “dominance” of Facebook (FB), Google (GOOG) and Amazon (AMZN), and all three stocks peaked seven trading days later. Over the next two months, Facebook dropped 23.5%, not reaching that Jan. 18 price again until May. Google fell 16.6% over the next nine trading days and didn’t regain its Jan.18 price level until June. Amazon fared better, on a relative basis, declining 15.6% over the following five trading days. It then zoomed on to new all-time highs.
This latest “Markets in an Age of Anxiety” issue was released on Aug. 16, 2019, amid the August market meltdown. Since the Economist hit newsstands, every sector in the U.S. equity market has gained ground, except for U.S. healthcare and basic materials.
This magazine cover risk is also not just an Economist-specific matter. By the time any publication is willing to devote an entire cover to a market-based story, that theme has been popular for a while and is most likely running out of gas. Not only that, but more importantly, for us market practitioners, the Behavioral Gravity for that market theme is most likely in “extreme” territory, so the behavioral risk of a reversal is off the charts.
The “Headline Risk” bottom line is that magazine covers are the ultimate contrarian indicators. They’re the financial market equivalent of the Madden Curse. That said, given the confluence of a Global and local Winter Fundamental Gravity combined with what we believe will be a brutal Q3 earnings season, U.S. risk assets are very likely to experience “an Age of Anxiety” during Q4 2019. Trade accordingly.
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