At the very height of the dot-com boom, in the summer of 2000, I was working for a business wire service, and one of the most important jobs in the office was the daily stock market story. Two reporters and an editor were responsible for following the daily gyrations in equities markets.
Each morning the reporters would check out the stock futures, and then hit the phones to ask fund managers, traders and analysts why the market was heading up or down. After many calls, they’d connect with somebody willing to float a theory, and a few minutes later you’d get a headline like “Stocks poised to fall over interest rate worries.” That would become the conventional wisdom of the day, and you’d hear that same thesis repeated over and over on radio, TV and the Web.
In the years since then, little has changed. If anything, the noise has only increased. When the market is up you’ll find dozens of websites and broadcasters reporting Wall Street is “optimistic the credit crisis is passing and that the worst effects of the U.S. recession have already been felt.” If stocks are down, it’s because of “ongoing credit woes and fears the recession will be deeper than expected.” If the market recovers tomorrow, revert to thesis one.
This horse-race style of markets coverage is a mainstay of all major media outlets, but there is one central flaw, widely understood but rarely acknowledged in public: nobody has any earthly idea what they’re talking about at any given moment.
One of my favourite memories of working at that wire service was the time I was enlisted to help find a plausible reason for a midday downturn on the TSX. I called a fund manager and asked my earnest question: “Why did the market turn around?” His answer: “Who the f–k knows? Markets go up and down. People decided to sell some stock.”
His quote never made it into the story, and that’s a shame because it spoke to an important reality that is completely lost in our hour-by-hour vigil over the Dow Jones Industrial Average. Stock markets are the distillation of billions of individual decisions, judgments, bets and guesses happening every single minute of every trading day all over the world. There are literally thousands of variables at work, and trying to determine one or two causal influences at any given moment is the very definition of a mug’s game–like weather reports consisting entirely of minute-by-minute updates on the speed and direction of the wind.
For a long time, I thought daily stock market reports were merely useless, but there is increasing evidence to suggest they are really much more problematic, and the consequences are getting worse.
A few months ago, Arthur Lupia, a professor at the University of Michigan, published a study demonstrating how these daily stock bulletins distort reality and misinform millions of people about their financial health. Lupia described a phenomenon that he calls “point blindness.” We’ve all heard hundreds of reports saying that “the Dow was up 100 points today,” but what most people don’t know is that the value of a “point” on the Dow Jones Industrial Average changes significantly over time. A 100-point gain today is not the same as a l00-point gain lo years ago, and even percentage changes are misleading because they don’t reflect the changing value of the American dollar. All U.S. stocks are priced in greenbacks, so if the stock market is rising while the value of the dollar is falling, investors aren’t any better off.
Lupia demonstrates this point by comparing stock market returns between 2001 and 2006, with the appreciation of the Canadian dollar. He gave study participants an imaginary US$10,000 and a choice of what to do with it. Option one: they could have invested it in the Dow Jones Industrial Average at the beginning of 2001 and cashed out five years later. Alternatively, they could have taken the money, converted it into loonies and left it under their bed for the same period of time.
Most Americans, naturally, opted for the stock. From listening to the news, they knew the Dow was coming off a major bull market and was up more than 17 per cent since 2001. What they didn’t realize is that the greenback had plunged against the loonie, meaning they’d be substantially better off if they’d just taken the Canadian cash and stashed it.
That alone is a serious indictment of the way we speak about stock market movements. All this talk about “record highs” on the Dow was sheer nonsense. But point blindness is just one of many problems with our stock market obsession. Contrary to popular belief, the Dow is a lousy indicator of economic health. The market crashed in 1987, but the economy didn’t run into trouble until three years later. By the same token, one of the longest and deepest stock market crashes in history started in 2000, but was followed by only a very mild recession. On the other hand, today economists worry about a deep grinding recession and mass layoffs, but stocks are rising.
It’s for all these reasons and more that monetary authorities like the U.S. Federal Reserve used to pretty much ignore the stock market. Paul Volcker and other central bankers knew their job was to fight inflation and protect the currency. But Alan Greenspan and his successor Ben Bernanke are as stock market obsessed as any day trader, slashing interest rates at the first sign of weakness and offering Wall Street multi-billion-dollar bailouts, based on the wafer-thin justification of shoring up confidence in the financial system. It’s madness. As Lupia’s study demonstrates, your stocks may be rising but it doesn’t much matter when the value of your dollars has cratered and the cost of living is through the roof.
The only useful advice is as boring as it is timeless: diversify your savings as much as you can–stocks, bonds, GICs, real estate etc. And next time you hear a stock market report, change the channel. It’s just the blind leading the blind anyway.