The gullible investing public have been regularly inured to believe, especially by mainstream media and their coterie of analysts, that non-economic events (wars, natural calamities & etc.) have significant impacts in the activities in the financial markets. But do such events really move markets?
CBS Marketwatch Mark Hulbert in his latest article “Explanations R Us” cites a study (emphasis mine)...
``A comprehensive analysis of the impact on the market of non-economic events, which despite being nearly 20 years old remains one of the standard academic works on the subject, appeared in the Journal of Portfolio Management in 1989. It was written by economics professors David Cutler, Lawrence Summers, and James Poterba (Cutler and Summers are at Harvard; Poterba is at MIT).
``The professors designed their study to find evidence that non-economic news regularly has a big impact on stocks. They focused on all entries in the "Chronology of Important World Events" from the World Almanac for the period beginning with Pearl Harbor and ending with the 1987 Crash, and then eliminated from their list any events that the New York Times did not carry as a lead story and that the Times' Business Section did not report as having affected investors.
``The result was a list of 49 distinct events, such as Pearl Harbor, the Korean War, Kennedy's assassination, and so forth. The professors then measured the average absolute return of the S&P 500 index on these days.
``The professors came up with little evidence that non-economics events had a big effect on the stock market. On average, across all 49 events on their list, the S&P 500 moved just 1.46%, less than one percentage point more than the 0.56% that prevailed on all other days. Because of this small difference, the professors concluded that there is "a surprisingly small effect of non-economic news" on the stock market.
The lesson here is not to simply to adhere to superficial clues or heuristics or mental short cuts. Sensationalism can divert you to wrong causes and lead your portfolio astray. The financial markets are more abstract, complex and multi-dimensional than commonly thought.
No comments:
Post a Comment