Why Daily Market Commentary Is a Joke

I haven’t watched Saturday Night Live for a long time, but I’ve been thinking about a classic line from the show’s Weekend Update sketch. Back in 1988, during the Winter Olympics, Dennis Miller opened his sportscast like this: “In Calgary tonight, Katarina Witt won the gold medal in figure skating, prompting Yankees owner George Steinbrenner to fire manager Billy Martin.”

If you’re not a baseball fan, the joke needs an explanation. Billy Martin was the manager of the New York Yankees during five separate stints beginning in 1975. The mercurial Steinbrenner fired Martin in 1978, rehired him in 1979, fired him again after 95 games, then hired and fired him three more times in 1983, 1985 and 1988. No one knows exactly what reasons Steinbrenner used to justify all those firings, but Katarina Witt’s gold medal performance in Calgary seems as good as any.

I remembered the joke this morning when I read the Financial Post’s daily market commentary: “The S&P 500 added more than 2% in the two previous sessions as immediate concerns over rising yields in Spain and Italy ebbed and on bets the Chinese GDP data would surprise on the upside.”

This commentary can sound so knowledgeable and wise. But to suggest that daily market movements can be explained in such simple cause-and-effect terms is laughable. If you want proof, all you need to do is read the commentary every day. You’ll just as often see statements like this: “The S&P 500 shed more than 2% in the two previous sessions despite immediate concerns over…”

It can’t work both ways: either these events affect daily stock prices, or they don’t. Once you accept this, you realize that commentary linking the S&P 500 to surprising Chinese GDP data sounds a lot like the joke about Katarina Witt and Billy Martin.

Here’s my own version of the daily market report: “The S&P 500 added more than 2% during the last two sessions because of an incredibly complex and largely random combination of factors that cannot possibly be distilled into one sentence. Analysts expect gains to continue during the second quarter, but since this is already priced into the markets, no one should give a fiddler’s fart what they think. Meanwhile, money managers have released their forecasts for the year, which will be widely read and acted upon, despite the fact that their previous forecasts were dead wrong. Tune in tomorrow for more of the same. In the meantime, stick to your long-term plan.”

28 Responses to Why Daily Market Commentary Is a Joke

  1. Canadian Couch Potato April 13, 2012 at 11:36 am #

    This update just in via Twitter: “TSX down as Chinese economic growth slows.”

    Make up your own market commentary. Why not, “Bond prices rise as Earth orbits Sun.” Or “Japanese stocks down as Wisconsin cheese production slows.”

  2. Millionaire April 13, 2012 at 3:10 pm #

    I read the market updates at least once a day and for all this time I’ve been wondering why I do it. I can imagine the newspaper’s boss go to his secretary: “quick! find a reason for this market move we need to print!”. A few years ago I turned into technical analysis and I swear I do better interpreting the markets moves. But for the finance intellectuals technical analysis is unfortunately unknown…

    Not to mention other stupidities like yesterday in the elevator screen I saw the market recap: Daily winners: ABC +0.01, XYZ +0.01, etc. What’s the point???

    Or when the commentators all applaused when the S&P TSX crossed 14000. What does that mean?? Guess what a week after is when back down into the 13000 and now it is in the 12000.

    It is so unfortunate that they don’t teach finance in high school (in Quebec) anymore. The situation is not going to improve. ..

  3. Canadian Couch Potato April 13, 2012 at 3:44 pm #

    @Millionaire: I love your examples. Somewhere along the line we’ve come to accept that every scrap of random market data is news that needs to be reported. At least part of the reason is that 24-hour media outlets have a lot of space to fill, and they’re desperate for anything new. Yesterday’s winners and losers scrolling across the screen? Why not.

    Another issue is that humans are hard-wired to act like this: we hate randomness, and we love anything that appears to offer explanations. It’s the same in sports: we see players with a “hot hand” in basketball, or we remark on a baseball player’s hitting streak. These are nothing more than random events that have no explanation, but that doesn’t make a good story on a sportscast, does it?

  4. Millionaire April 14, 2012 at 9:24 am #

    I can tell you for sure in Quebec it’s not because of 24 hour news channels. Finance and business coverage is for sure less than 1% of their programming grid. Even with less than 1% they don’t even make it interesting.

  5. madMike April 14, 2012 at 11:45 am #

    Hilarious. I love it. Sometimes I watch BNN for a laugh. Now there’s a new business radio station starting here, because there’s a “need” for it. I guess it’s entertainment. Wait, gotta go, I think I hear Cramer on Mad Money.

  6. Jeannette Dowson April 14, 2012 at 2:02 pm #

    This little article confirms exactly what I was thinking. I’m pretty new to investing. Recently I entered the world of ETFs and invested a little chunk of money in the S & P. I’ve been following this exchange and have been reading articles and analysis as an excercise in research. It’s becoming clear to me that the hardest part about investing is separating the wheat from the chaff when it comes to information.
    As for daily market analysis being entertainment….yes I think it is, much like the horoscope, and about as useful.

  7. Jack April 14, 2012 at 6:13 pm #

    …everything is priced in…oh wait, no it’s not.
    Risk on, or risk off…that’s my favorite.

    Commentary A:
    Risk was off today as investors contemplated that maybe the firewall in Europe was not sufficient, and or pondered the implications of a slow down in China.
    or
    Commentary B:
    Risk was on today as investors felt the firewall in Europe was sufficient, and or felt the possibilities of a slow down in China was minimal.

    Mr. Smith: “Sally, was the market down today”
    Sally: “Yes”
    Mr. Smith: “Go with commentary A”
    Sally: “Good thinking sir”

    HA!

  8. MikeM April 15, 2012 at 9:58 am #

    I bet if you randomly selected ‘up’ or ‘down’ day commentary from any point over the past 50 years as the cause for today’s market fluctuation, people would be hard pressed to know the difference.

  9. John April 15, 2012 at 1:22 pm #

    Well said! I think watching daily changes in stock markets and reading the commentary is fun but, I don’t think basing long term choices on daily girations is a good bet. I have been trying to gauge where the markets should be compared with 20 years ago. I believe you can use history to guesstimate future performance or else there would be no benefit to investing. No one can predict short term directions but, a good long term bet isn’t that hard. ETF’s will serve me well with an equal bet in short term high quality bonds. I look forward to rising Yields on bonds as I am not willing to lend money at 2% for a term more than 1 year. And high-yield bonds act like Equities and thus don’t have a place in my portfolio now. Patience and foresight are key to a long term investment.

  10. JAH April 16, 2012 at 1:15 pm #

    On top of all the other reasons not to pay attention, I hate being annoyed by the expectation that the market is supposed to go up every day and every loss is a crisis.

    I am reminded that if the market only went up 0.1% but did this every day, that would be around a 25% gain for the year.

    You can do the math on the nonsense that would spin out from higher numbers, including hyper-inflation.

  11. Lenny April 16, 2012 at 4:43 pm #

    I also find these to be annoying radio and TV space fillers. But they could at least make them more entertaining by injecting high octane sport cliches – “TSX pummels Dow with 100 point beating on news of killer 10 pt rate hike”.

    Then there was today’s anxious “Investors awaited the March Consumer Price Index, due at 8:30 a.m. EDT”. Dang it… thats why no one was answering….my day is ruined.

  12. Bryan April 16, 2012 at 6:19 pm #

    Plus, if the markets really are 100% efficient, any analysis is already cooked into the numbers. 🙂

  13. John too April 17, 2012 at 4:27 am #

    “Market falls on news that market falls”

    (from Daily Onion website).

  14. Canadian Couch Potato April 18, 2012 at 1:18 am #

    @John too: Love it!

  15. Andrew F April 18, 2012 at 11:27 am #

    It’s the implied causation that drives me crazy. No one really knows what causes which effect. For some hack (or increasingly, a content-generating algorithm) to suggest they do is ridiculous.

    And I have to agree; I hate stock tickers. Who cares whether stock X was up 10 cents. % change is far more relevant. I’m usually only curious about the top ten gainers/losers, as it indicates that there might be some material news that I hadn’t heard of.

  16. AAAMP Blog April 20, 2012 at 1:11 pm #

    Right on! One of my favorite sayings is “If anyone tells you they know what the market is going to do in the short term, they are either a fool or a liar”. In the long term stock prices are driven my company earnings. If you buy companies who earnings increase over time, at valuations that are reasonable, you will do well. Day to day price movements are just noise that should be ignored.

  17. Scott R April 24, 2012 at 2:07 pm #

    Great post Dan. Love the SNL reference as well.

  18. Canadian Couch Potato April 24, 2012 at 11:11 pm #

    @ScottR: Thanks for the comment, and for cutting through the noise. 🙂

  19. The Investment Fiduciary September 7, 2012 at 8:52 am #

    My commentary would be like: “The S&P 500 added 2% because it likes to fluctuate for no apparently reason … daily. Paying attention to it is as useful as paying attention to traffic noise in a busy street.”

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