18 Jan, 2017

Magazine Covers and Financial Markets

Now when I say you should not focus on external events, it does not mean that you should go and live in a cave and shut yourself from the rest of world, because that is only way you will be able to escape all the noise in media. It means that you need to control Greed and Fear: the two emotions that strike you when processing such noise.
I am going to use magazine covers which would widely cover and try to predict the impact of different social, economic or political events on the stock market. So today is going to be more of images and pictures.
Now let us go back to 1979 and look at the cover of BusinessWeek on Aug 12th.

This was one of the most bearish articles on the equity markets ever. It made the point how the US economy was in the grip of inflation and equities were dead as an asset class. Now what happened after that was that the market made its all time low on Aug 13 1979 and never ever visited that price. And not only that, the S&P went up more than 13x over the next 20 years after that cover. And the same thing happened in 2002. Another bearish cover was published by Businessweek and another low was made by markets post which they doubled over the next 6 years.

And then Time Magazine said we won’t be left behind and they published a very positive article in 2005 on housing in America and we all know what happened after that. If you don’t know then you should watch this movie called “The Big Short” based on a book of the same name by Michael Lewis.

Below is an example from Indian media. In November 2008, the month that Business Today came with a cover story on the Great Financial Crisis, Indian equity markets made a low and took off again.

In fact Princeton economist Paul Krugman once stated that for “whom the Gods would destroy would first put on the cover of Business Week”.
Now you may think these are cherry picked examples and hence I ask you to do a fun exercise. Go back and look at cover stories of big events and predictions made by magazines and electronic media of those on the markets and then look at performance of the market post that.

It is not about pointing fingers at the media, but more to illustrate the point that no one can predict what effect will any event have on markets.

In recent times we have had two big events in 2016. Brexit and the election of Donald Trump. Both were considered to be very bearish and catastrophic events by the media. And see how markets reacted. The British FTSE is up a massive 17.6% since Brexit and the US Dow is up 8.1% post Trump’s victory on November 8 2016. So it is futile to go by media or anyone’s predictions of how markets will perform.

There are some links below if you want to read more about the so called Magazine Cover Indicators or the Curse of Magazine Covers.

  1. Are magazine covers a contrarian indicator?
  2. The Curse Of The Magazine Cover Indicator
  3. Misunderstanding the Magazine Cover Indicator