The Silliness of Financial Commentary
Nothing very serious here. Just a few musings on the silliness of some of the nonstop commentary we hear on financial TV.
Wall Street commentators have a large bag full of descriptions and definitions that defy common sense. One that has gained great currency over the past couple of decades is the definition of a stock market correction or bear market as, respectively, a 10 % or 20% decline from a cycle high without regard to elapsed time. Even more absurd is the treatment of those phenomena as places rather than processes. It’s not uncommon to hear a TV commentator exult that a stock market average exits a correction or a bear market if it rises to levels less than 10 % or 20% below its cycle high. Obviously, it could go back below such levels in a day or two and conceivably could descend much farther. The correction or bear market begins at the price peak and lasts until the tough is reached, notwithstanding vacillations above and below 10 % or 20% levels. The decline is a process, not a location.
The absurdity of such a quantitative definition becomes apparent if one examines the reverse concept of a bull market indicated by a 20% or greater rise from a prior low. The greatest stock market loss in US history was the 89% decline of the Dow Jones Industrials from September 1929 to July 1932, a period of 34 months. How many BULL markets would you expect to have encountered in a span of time that erased 89% of investors’ equity assets? Most people would say “none”. In fact, based on closing prices, there were five advances of 20% or more. Were they bull markets? Not likely.
That brings me to the concept of surprise statistics. Financial commentators would do well to ask their elementary school children to define “surprise”. Even the youngest could tell them that it’s the experience of something unexpected. As this quarter’s earnings season moves toward its close, it strikes me as humorous to have read a research report describing the percentage of earnings surprises as slightly higher than the norm (about 67% beating the consensus of analysts), yet the amount of the surprise typically was below the norm of about 3%. How surprised should we be when almost 2/3 of corporate earnings reports typically come in above the consensus of analysts by an average of about 3%? That’s hardly a surprise; it’s an expectation born of experience.
By Thomas J. Feeney, Chief Investment Officer
