Media Coverage and the Investment Cycle

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June 5, 2018
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We live in a time of information overload. Between the internet, social media, and mobile devices, today’s investors are inundated with more media coverage of the capital markets than ever before. Unfortunately, better access doesn’t necessarily equate to better investment decisions. In fact, the vast majority of the coverage is irrelevant and has no effect on asset prices. History shows that we can look at the characteristics of more relevant coverage to gauge where the market is in the investment cycle of various assets. This allows us to measure market sentiment and positioning (i.e., how many are buying vs. how many are selling), thus letting us gauge the efficacy of our models as the asset price cycle unfolds.

The most common phenomenon, well known to sports enthusiasts and investors alike, is popularly dubbed the “magazine cover curse.” In the business world, when a financial story is positively highlighted in extreme fashion on a magazine cover, then the topic of that story is likely at its peak. It’s not limited to bullish ideas, as extremely bearish stories on magazine covers often mark the trough. This is a common occurrence in capital markets, for both assets and individual managers. The most commonly cited example of this phenomenon is the August 13, 1979 BusinessWeek cover that boldly proclaimed “The Death of Equities.” The equity market went on a decades-long tear and didn’t reach its peak until more than 20 years later (Figure 1), after multiplying by 14 times on a price basis and 26 times on a total return basis (i.e., including reinvested dividends), for average annual returns of 9.3% and 11.6%, respectively.

Figure 1. Following “The Death of Equities” BusinessWeek cover, the S&P 500 rose more than 14 times in the next 20+ years.

[caption id="attachment_1648" align="alignleft" width="667"]

S&P 500 rising chart

Sources: FactSet and BusinessWeek[/caption]

History is replete with similar examples, as shown in Figures 2-7:

Figure 2. The Economist marking a bottom and top in oil.
Economist oil magazine covers

[caption id="attachment_1650" align="alignleft" width="670"]

Oil magazine performance along with S&P

Sources: FactSet and The Economist[/caption]

Figure 3. Time covers calling the top and bottom of the housing bubbles.
Time Magazine covers on home ownership

[caption id="attachment_1654" align="alignleft" width="684"]

Home ownership magazines and FRED performance

Sources: FRED and Time[/caption]

Figure 4. A Time special report marking the end of the bear market in 2009…
TIME holding on for dear life cover

[caption id="attachment_1656" align="alignleft" width="680"]

TIME holding on rope performance with S&P

Source: Factset and Time[/caption]

Figure 5. the very day.

[caption id="attachment_1657" align="alignleft" width="674"]

Graph with TIME holding onto rope magazine

Source: Factset and Time[/caption]

Figure 6. The Economist’s call for a bullish dollar right at the top in late 2017.
Washington with ripped muscles on cover of The Economist The might dollar issue

[caption id="attachment_1659" align="alignleft" width="678"]

The mighty dollar performance with S&P

Sources: FactSet and The Economist[/caption]

Figure 7. Time naming Amazon CEO Jeff Bezos its 1999 “Person of the Year” at the peak of Amazon’s three-year stock collapse.
TIME Jeff Bezos cover

[caption id="attachment_1661" align="alignleft" width="681"]

TIME Jeff Bezos S&P performance

Source: FactSet and Time[/caption]

Why does this happen?

Quite simply, the media are not interested in providing effective investment advice; rather, they want to sell stories. To do this most effectively, they gauge sentiment and then cater to it. After all, there isn’t much money to be made selling a story that (relatively) no one is buying. Instead, they sell stories to which they think people are already attuned. At extremes, these media reports reflect action that has already occurred. Thus, when the media reports extreme sentiment, investors can wisely assume that the public sentiment is already there, and thus the trade has already begun to (or has completely) run its course. Put differently, stories that indicate there is “never a better time to buy” or “never a better time to sell” occur not because they are meant for people who have not yet made a decision, but rather because they are selling to people who wish to confirm that their prior-executed decision was a wise one.

This phenomenon is pervasive. However, there are two important guidelines that will help lead investors to the right conclusion about where the asset is in its price cycle:

  1. The more generalized the media source(s), the more the asset cycle has already run its course.
  2. The more prominent the story placement, the more the asset cycle has already run its course.

How is this relevant to Balentine clients?

While the indicators in Balentine’s Tier 1 model are not focused specifically on media coverage, the inputs work using a similar philosophy. Balentine’s models aren’t designed to “time” the tops and bottoms of a particular market cycle; instead, they allow us to gauge momentum and valuation in the equity markets and let us know when it’s time to capture an asset’s potential value and when to get out of the way of trouble. A better understanding of this phenomenon allows us to monitor behavioral developments in the asset market while keeping an eye on our models. In addition, it allows us to gauge the efficacy of our models in relation to the asset price cycle based on what the media is saying about those assets.

At the end of the day, it’s important to remember that the media is out to sell and to entertain, not to provide concrete investment advice. While Balentine’s approach may mean we are slightly ahead of or behind any given Time cover, over the long term those differences are minimal and keep us from succumbing to "head fakes." After all, as Jim Cramer admitted to John Stewart in 2009, he’s just “a guy trying to do an entertainment show about business.”

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