Close Reading: Will the Market “Tumble Back to its Coronavirus Lows in March?”
A reader saw a disturbing article and sent me a question about it. I suspect that many other readers of this article were also worried. It was a mainstream media article using data from a reputable source. Despite these credentials, the title, Will the stock market tumble back to its coronavirus lows in March? About 92 years of S&P 500 history says there’s a good chance, is not supported by the evidence and argument.
Investors must protect themselves by going past the headline. If the conclusion seems important, give the entire article a close reading before taking any action with your investments. I’ll use this article as an example. Let’s start with the heading for the story:
“Since 1928, reviewing the past 25 bear markets, there has been a lower price put in by the S&P 500 index 60% of the time”
Suppose this statement is accurate. Is it worrisome?
- It means that there was a lower price 15 times, but not the other ten. Looking at the actual numbers instead of creating 60% “odds” presents a clearer picture. The chance of returning to the lows would be little more than a toss-up. 25 cases do not provide a very good sample for this type of conclusion. Suppose that you learned that your child’s class had 15 girls and ten boys. If a new student transferred in, would the odds be 60% that it was a girl? If you looked at another class at the same school would the gender division be the same?
- Are the prior bear markets similar to current conditions? No, they actually seem quite different. Every metric I examine shows unprecedented readings. Investors are confronting a unique problem. Will the recovery be as fast as the decline? Will it require revisiting the lows? I don’t know, and I won’t find out by looking at past bear markets.
What can we learn from the data? The author writes as follows:
Making a finer point, however, Bespoke notes that of the 11 bear markets from 1928 through 1940, 9 of them saw the S&P 500 make a lower low, but since 1940 most bear markets have tended not to see retest (see attached table):
Another way of describing the result would be to look only at the time after the Great Depression. Six of 14 cases, only 43%.
Or look at the time since 2000 and say that a new low was made 75% of the time!
Takeaway for Investors
I chose an article that accurately provided all the data and where the author’s conclusions were modest and nuanced. The headline is another matter.
- Look past the headline. These are often presented in a dramatic manner that overstates the evidence.
- Ask whether the evidence supports the conclusion. You need not be an expert in statistics to spot problems like an inadequate number of relevant cases.
- If possible, look at the data yourself. What patterns, if any, do you see? If you were to write a report summarizing the information, what would you say?
Making good investment decisions can be challenging. Applying close reading and critical thinking is essential for your own protection.
I began 2020 with a commitment to advancing investor education, so I plan more articles on this and similar themes. I welcome questions and examples that could be the topic for future posts.