Photo Copyright Chicago Tribune
It’s 3:15 on a very humid Tuesday in July. It’s been a quiet day in all of the US markets. Not much happening. At least, nothing of any real interest. It may be good news for some, but for Paul Ryan, whose job it is to prepare the script for the station’s financial anchor, a quiet day is a bad day. Paul’s spending what little time is left before today’s broadcast combing through all of the various financial feeds looking for something of interest to report on. Just then all of the US markets start to dip. The DOW, NASDAQ and S&P all start to fall. There is a major selloff taking place and it is moving fast. By the closing bell they are all down somewhere between 1% and 1.5%.
For Paul the good news is there is something to report. The bad news is “what just happened”? It’s already after 4 o’clock and the station’s financial segment begins in less than 90 minutes. Paul knows what happened. But the questions that needs to be answered is what caused the selloff. Paul frantically checks all of his many sources and finally concludes that the most probable cause for the rapid decline was the release of poor performance numbers right before the close by two of the nation’s largest retailers.
Paul quickly summarizes the story and works with the graphic arts staff to pull some photo clips etc. for the broadcast.
Less than an hour later the station’s financial anchor reports the story much like Paul summarized it. He reports with great conviction what happened and the cause. We all know what happened. All the major U.S. indexes declined, by more than 1%, in less than an hour. But do you really think that Paul, the anchor or for that matter anyone else really knows what caused the selloff.
So what is the lesson to be learned here? There were really two events that Paul and the station’s financial anchor were trying to report on. First, what happened? And that can be reported with accuracy and conviction. The Second part, what caused the decline? That is simply the best educated guess that they could come up with in less than 90 minutes. The problem is that they all too often represent both parts as FACT. Why? Lots of reasons, but one that seems to repeat itself on far too many occasions is that “Pendants” seem to feel the need to always have an answer.
To quote the famous economists John Maynard Keynes “Pundits forecast not because they know, but because they’re asked.”
When something happens that affects stock prices it can either be good or bad. Let’s first address the good news. You’re driving to a client meeting and you’re listening to the news. When the financial anchor cheerfully reports that the DOW is up 300 points due to …… and it could go higher. Good news! It would be nice to know exactly what caused stock prices to move upward, but there is no real or suggested call to action. You just accept the good news and let your portfolio ride. You’ll hear the full story on the evening news.
In summary, the underlying cause is really not that important to you. And as far as the networks are concerned viewership is not expected to spike this evening. Bottom line, “good news” doesn’t really sell.
Now let’s look at some bad news. Same scenario, but this time the anchor reports the DOW is down 300 and still falling. Now that gets your attention. It is now important that you know more. Like what is happening? What sectors are most impacted? What is happening to my portfolio? What are they predicting? Why are you so interested? Well, you may want to or need to take action. Sell, hold, buy on the dip, etc. And the last thing you want to do right now is wait until the end of the day to find out. By then it is too late to act.
Yes, “bad news” gets lots of attention and the media know all about that. Reporters thrive on bad news or the hint of bad news because it sells. Paul Harvey a world renowned commentator once lamented that after World War II he was part of an effort called “Radio Free Europe”. It was an attempt by the west to remind all of the people behind the “Iron Curtin” that things were better in a free society. But as Paul recalled they were reporters and so they focused on problems like strikes, riots, inequalities, political differences, and other challenges in a free society. Why? That was what they were trained to do. Bad news Sells, at least in the west. He lamented that if Radio Free Europe had hired a bunch of marketing firms from Madison Avenue and gave them some really great products to sell like Freedom, Democracy, Prosperity, they would have had everyone behind the Iron Curtin whistling “Yankee Doodle Dandy”.
Hopefully, you’ll be a little more skeptical of the explanation that you hear on the news, whatever the source. And it might be a good idea to adopt an investment strategy that diminishes your reliance on the news and doesn’t require difficult decisions on your part every time the markets make an adjustment.