Why Most News is Meaningless

The news is a tricky subject for most investors. Real time feeds with hundreds of articles are now streaming to even small account holders. This flow of information can be confusing and is quite often meaningless. In order to differentiate their product from their competitors, financial news producers now try to report the “whys” behind market movement rather than just the “whats.” This is a problem that catches a lot of investors off guard and can lead to bad conclusions.

[VIDEO] Why Most News is Meaningless

The truth is that no one fully understands the whys behind market movement in the short-term. There are a few things we understand in general but it is extremely rare that market movement can be attributed to a single news event on a given day. This article will use two case studies to illustrate its point and will conclude with a few suggestions for harvesting the legitimate value from financial news reporting.

1. Economic Announcements

General economic releases often are blamed as the cause for volatility in the market. A recent headline is a great example of this; it read “Rise in Jobless Claims Weigh on Stocks.” This article title seems to make sense on the surface; if jobless claims are rising then stocks should suffer. The day this article was released (4/23/2009) the market was down slightly and therefore the logic seemed sound.

Unfortunately the cause and effect suggested by this article can not be shown to be statistically true. A basic mistake made by financial writers is to confuse correlation with causation. Although the market went down on the same day jobless claims went up (correlation) jobless claims cannot be proven to have “weighed” stocks down (causation).

Lets walk through the logic the author presents. According to this writer, the market went down because jobless claims went up. This weekly number is important so the emphasis seems to make sense. Over the last 10 previous announcements the jobless claims rate increased significantly 4 other times. On these days the market closed up twice, ended virtually flat once and closed down once. This seems to be hardly predictive.

2. Earnings Reports

These news releases are issued by a public company on a quarterly basis. Although the releases can be shown to cause increased price volatility the direction prices move after the news is very random. This issue will not deter financial writers from attributing “whys” to the earnings news but the same statistical problems exist.

For example, that week Bristol Myers (BMY) released quarterly earnings with higher profits, bigger sales and lower costs. This was all done in spite of a stronger dollar, which can hurt BMY’s international sales. Fatter margins on higher sales sounds like a pretty rosy picture. However, despite the “good” news the stock fell and has continued falling.

In fact, over the prior 6 quarters BMY has exceeded earnings expectations and yet the stock is down significantly over that same 18 month period and was up or down randomly on the day of the earnings releases themselves. Why would a stock go down on good news? Not surprisingly this happens all the time.

Human beings are very uncomfortable with unanswerable questions. But the nature of the market is unpredictability which creates risk and a day to day reading of the news can’t reduce that risk in a predictive and meaningful way. The search for answers to the “whys” behind market movement will keep readers searching for writers willing to give them an improvable and probably wrong conclusion.

Does this mean that most news is meaningless? In many cases, yes. Major news producers are well aware of the issues behind financial news and it is common knowledge that they produce more than one story for earnings or other market events before the release only to publish the one that matches the event and market action right after.

However, there is hope and meaning behind the news when it is evaluated within the context of trend. For example, after a few years of very mild weekly unemployment claims, these numbers began escalating significantly in 2008. It was clear that the mild trend was ending and unemployment could become an issue. That was put to use by many investors who took a much more conservative stance in 2008 as a protection against an employment problem.

In the example of unemployment releases from 2005-2008 the news was useful because there was more data and therefore more statistical relevance. The outliers were smoothed out and real insight could be gleaned from the information. This is good news for investors. There is meaning in the news when used within context and trend and it does not require a real time news feed to get it.

 

Image courtesy futureatlas.com.

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