The Irrelevance of Financial News
I have been a consumer of financial news for more than thirty years. For fifteen years I have joined in financial writing, consistently citing the best work I can find. Traditionally investors could see great stories on the economy, corporate earnings, relevant government policies, and suggestions for investment themes.
Things are different now!
The world has changed, but the news stories have not. Let’s start by looking at some objective measures of the dramatic recent changes.
Stock Market Volatility
The best measure of anticipated volatility in stocks, closely tied to recent volatility, is VIX. While this is a tradable index, the value is based upon the implied volatility of near-term put and call options on the S&P 500 Index. The OldProf simplification: Options on the S&P 500 Index are freely traded and based upon market expectations for volatility. It is not a direct result of VIX trading, but a calculation based on S&P 500 options trading. It is an objective market price.
The recent spike is apparent.
The Change in Language
Society – worldwide – had transformed in a few weeks. Language is an instant indicator of change. Here are a few examples. First, the old.
- Who will win the pennant? Which team made the biggest off-season improvements?
- What are the best new movies?
- Are there any great new restaurant openings in town?
- Stocks? Hey, just buy the dips.
- Spectacular cruise line offers.
- The Fed is out of bullets.
And now the new.
- Social distancing.
- Bending the curve.
- Shelter in place.
- Quarantine rules.
- Unemployment surge and economic ripple effects.
- How to work from home.
Our language reflects what people are thinking, changing with current issues and culture.
The new world has not been matched by changes in financial reporting. It seems like everyone has a job and is sticking to it, even if they are doing it from home. Current relevance is not important.
Here are examples of current subjects:
- Whether the market will “retest the lows.”
- When (or if) it will be time to buy stocks.
- Whether the COVID19 decline confirms a theory of stock valuation.
- Whether political leaders will fumble the chances for economic recovery.
- Whether the Fed had made a mistake. (Going too far and not far enough are both popular topics).
- Which investments you should make – right now!!
In this week’s monitoring of the news I saw the following:
- Three Fed participants provided opinions. Not on the economy. Not on the course of future Fed policy. They all had something to say about the pandemic, what steps were necessary, and what the effects might be.
- A manager from an investment firm had a featured spot on CNBC. He was talking about what to expect on “the other side.” That is a good question to raise! He stated that we might be headed for a Japan-style aftermath with everyone chasing yield. In that case, the same stocks that worked before the crisis would be back in vogue. On the other hand, the large government stimulus might create a “risk-on” environment where the cyclical stocks and small caps would be better. He is a “market strategist.”
- The Pundit-in-Chief explained what we needed to do to stop the pandemic and reopen the economy. Readers are familiar with his credentials, which are neither scientific nor economic.
- Most of the economists in my Twitter feed were arguing politics.
- The CNBC Halftime Report was featuring a debate over whether some businesses should be allowed to fail instead of receiving government support. Josh Brown said it was the most popular segment in ages. Wow! So a group of traders are discussing a fundamental ethical question and the role of government, moral hazard, and why markets struggle to provide collective goods. These are, of course, all topics covered in early college classes in political science, philosophy, and economics.
Late in the day, the Barron’s main page provided this look.
My first reaction was that the author was looking at a different set of earnings reports from the ones I saw. My second was how an individual investor could find any help from this mishmash.
How to Filter Daily News in the Crisis Context
The most important step, by far, is to remember the expertise of the speaker or writer. It is easy to say, but also easy to forget.
For pandemic news, listen to scientists and epidemiologists.
For news about reopening part of all of the government, listen to political leaders. What criteria are they using?
For economic effects, make sure the source is clear about the pandemic and government assumptions being used. Do not permit ideology or opinion to slip in.
For impact on corporate earnings, listen to the company executives themselves. The conference calls this earnings season are especially important.
And finally, for the effect on the stock market, do not listen to anyone. Without good answers to the underlying questions, everyone is just guessing. Especially, beware of emphasis on what is working right now. Investors should not try to match the agile traders. Ask what will work next year, not what is working now.