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Everywhere you look right now the headlines are bleak!
Wars, oil shocks, economic uncertainty, and predictions of market crashes.
But do those headlines actually predict what markets will do next?
In this episode, Tim breaks down the research behind media sentiment, why negative financial news dominates the headlines, and the real cost investors pay when they react emotionally and miss the market’s best days.
If you have a question, suggestions, or a topic you would like us to cover, please send an email to: [email protected]
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The information shared on The Dollars & Sense Podcast is general in nature and does not consider your individual circumstances. Dollars & Sense exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Tim Ellis (FSP778196) and Brodie Haggerty (FSP778174) are both Financial Advisers providing advice on behalf of FoxPlan Ltd. FoxPlan Ltd (FSP39630) is a licensed Financial Advice Provider. Important information can be found at www.foxplan.nz/disclosure
We are not even one week into March yet and what the heck is going on in the world.
Look at stuff, look at the New Zealand Herald, look at any media or outlet and there's
going to be some very, very bleak headlines right now.
Under those headlines are other stories telling us exactly what's going to happen with the
stock market and lo and behold, the forecast does not look good.
Are these headlines accurate enough?
Are enough people singing the same song to actually be an accurate signal to tell us what's
about to happen?
But why are these stories all singing the same narrative?
But why so negative?
Is this time different to others and do we really need to act?
Welcome to another episode of the Dolly's Incentive Podcast.
As per usual, you'll listen to myself, which is Tim Allyson, a qualified financial advisor,
looking for a firm in Wellington called Fox Plan.
Now this week's episode, we're going to be breaking through some of the media noise.
This is a story that you're going to hear quite a lot from a lot of financial advisors
and it's an easy message to give, very hard message to follow.
So in this week's episode, I'm going to be breaking down, you know, does all these negative
headlines about the economic outlook of the future actually provide us a signal to
what's about to come?
If enough people are singing the same song, does that give us safety and numbers that
they have something right?
Why are they also negative?
What's the rationale behind that?
And what is the potential impact of not doing anything?
What effect could that really have on achieving your financial goals and your personal portfolio?
Just before we get underway with this week's episode, as per usual, want to be super
clear, everything I'm going to talk through today is educational purposes only.
It is not designed to be specific financial advice.
We highly recommend seeking the relevant professional before making any major financial decisions.
With that out of the way, let's get underway with this.
So I guess the first question to be answered here in my opinion is, is having all these
negative headlines about the economic outlook of what's going on in the world at the moment
and what effect that's going to have.
War in the Middle East, oil prices supposedly about to surge, and a very strong sentiment
that this is going to have a large impact on investments, kiwi savers, or all managed
funds, US stocks, worldwide stocks for that matter.
What's the truth of the matter?
Whether the geopolitical events that are occurring right now have an effect or not,
I'm just going to park that to one side.
But what I want to highlight here is if enough people are singing the same song with media
and negative noise, can that actually have an effect on a portfolio, whether there is
or is not any business disruption to any of the companies within the portfolio?
The answer is yes.
There was a study released in 2024, the quarterly review of economics and finance.
Research has actually studied whether the tone of financial news has an impact on stock
markets and investor behavior.
So this study, it analyzed more than 35,000 articles published in the Financial Times,
which was covering 40 companies that were included in the Dow Jones Industrial Average
between 2005 and 2018.
Some of the companies that were within this study were the likes of Apple and Microsoft,
JP Morgan, Goldman Sachs.
Things that quite often receive constant media attention.
What the researchers actually did for this study is they used automated text analysis to
measure the tone of the language that was used in news articles.
So in simple terms, they looked at how many negative words appeared in articles written
about each company, words that signal pessimism, risk or concern.
Using that information, they then grouped companies into different categories, depending
on how negative the news coverage around them actually was.
So they compared companies receiving very negative media coverage with companies receiving
what they called least negative coverage and looked at how their stock prices performed.
What the results actually showed is that media sentiment does have an impact on stock market
behavior, particularly in the short term.
In fact, the researchers actually found that the media sentiment was statistically significant
in five out of nine major asset pricing models that were used to explain stock returns.
So when they looked at individual companies, the sentiment factor was so significant that
three quarters of the stocks in the sample, that was 40 stocks they used, so three quarters
of those companies studied had a significant impact from very negative media coverage.
So clearly the tone of financial news does influence markets to some degree, but the
next finding is where this research became very interesting.
So researchers built a simple strategy that bought companies receiving the most negative
news coverage and sold companies that were receiving the least negative coverage.
In other words, they were testing whether investors tend to overreact to bad headlines.
What they found after doing this exercise was that that strategy actually produced positive
returns over time across the full sample period, the negative sentiment portfolio generated
an average return of about 4.4%.
In other words, companies receiving the most pressed often end up performing better than
expected once the sentiment became normalized.
However, there was an important caveat that must be mentioned.
I'm sure plenty of listeners are thinking the same thing, even though that strategy
worked, that the overall market actually still performed better, about 7.75% overall.
So while media sentiment does influence short-term pricing and investor behavior,
it still didn't manage to outperform simply owning the broader market.
I just want to point out that that was over very short time frames,
so that the immediate impact of stories coming out.
I'd like to try and relate this to a bit of an analogy.
That might make more sense because the reality is that while sentiment can make fluctuations
occur and in this study, it was unequivvently proven to be the case,
the long-term outcome is investors will always revert back to fundamentals,
valuing a business on fundamentals rather than sentiment.
And prices will then equal out in the world of fairness that prices are fair.
To try and put that in an analogy that makes it a little bit easier to believe, I guess.
Try and think about a supermarket that has significantly cheaper prices overall.
Try and maybe think of a yellow and black one we might all know.
Now let's imagine that there was a story that came out and went crazy over social media
and hit all of our news outlets as well, that there was a rat infestation that was running
around the project section of one of their supermarkets.
That kind of press could have an effect on consumers not going to that particular supermarket,
whether it's the one in their neighborhood that was actually affected or just nationwide,
there might be a negative sentiment that stops consumers going to that supermarket for a while.
In time, however, consumers will always revert back to the fact that fundamentally,
the prices at that supermarket are cheaper than say a red and white one.
And so consumers will always return. But where the bargain and the discipline comes in here is,
what if that supermarket in reaction to that bad press put on some amazing deals and prices
in bargains, those that stayed loyal to shopping at the supermarket with cheaper prices would have
also picked up those bonus gains in between. I hope that analogy tries to put things in a
a little bit of perspective as to understand why short-term fluctuations might occur,
fundamentals will always return and make prices fair.
Now let's examine, well, these media outlets, they must have some very good journalists that look
into things and surely, surely if every media outlet is singing the same song and giving us the same
doomy outlook, then maybe their safety and numbers, they must be right, at least more often than
wrong, surely. Well, let's look at history. I have some examples much to the contrary.
Here are some headlines that have occurred over time and I've also got the stats on what
happened the following 12 months after those headlines. Get a load of this one.
Strong global growth expected to continue by the New Zealand herald in 2008.
What happened that year? Negative 33%. They got that one wrong.
Stocks hit record high as investors bet on strong economy and as global media coverage 2022
result that year for the NZX50 negative 12%.
2012 Otago daily times middling years are expected. New Zealand shears rose 24% that year.
2019 New Zealand herald it's difficult to see what might turn the negative sentiment.
That year New Zealand shears rose 30%. In the same year and I don't mean to pick on New Zealand
herald I don't think I'll be getting any sponsorship from NZ me these days. But in the same year
2019 stocks have a roller coaster ride amid fierce trade wars will stifle growth. New Zealand herald
2019 again that year 30% gain. So no, I don't think that you can use these doomy gloomy headlines
that you'll hear even though they paint a very understandable believable picture and a sentiment
and a story and there might be safety and numbers. Well if we look at history at how well they are
predicting the future, not very well I might add. When I was trying to put together examples of
different headlines that where they got it completely wrong of course I could do that quite easily
but what I did manage to find or deduce from doing that exercise was there was a lot more
negative ones where they were wrong than there was positive ones when they were wrong.
So a big question why so many negative headlines? Why is this a common pattern? The answer is
and I'm sure many people would expect exactly this as well but there was a study done why negative
headlines get more attention. So the study was published in Nature Human Behaviour. It's a highly
respected peer reviewed scientific journal. The research analyzed data from the Upworthy Research
Archive which is it contains large scale experiments run by media company called Upworthy.
So the data behind the study, what they actually did is they analyzed real world headlines
experiments. They had nearly 28,000 randomised controlled trials. They had 105,000 different
headline variations, 370 million headline impressions and 5.7 million clicks. It was on a large scale.
So they had over 53,000 unique headlines analysed in this study. So in each experiment different
headlines were shown for the exact same story. That was to allow researchers to isolate the
impact of wording. That's actually quite important because it allowed them to measure calls or
effects, not just correlations. What the study unearthed is that each additional negative word
increased a click-through rate by 2.3% for every negative word included. On the other hand,
each positive word actually reduced click-through rates by about 1%. They also found sadness
increased clicks, joy decreased clicks. So negative wording had the biggest impact on stories about
government and economy especially. So that's why if you're reading a story about the future outlook
of the economy, the government, you're more often not going to find a negative sentiment in a
negative story. Why? It's because humans have this thing called a negativity bias. This is new
to me. I haven't studied and learned a heck of a lot about the negativity bias, but from what I
gather it, humans managed to negative information grabs attention faster. It triggers stronger emotional
responses and it just, it's remembered more easily. That's what leads to this higher click-through
rate and engagement. Even though the stories were exactly the same, that's what this research
unearthed. So I guess the answer to the question, why are all these headlines so doom and gloom
if enough people are singing the same song as their safety and numbers? Well, actually the numbers
are there because they're all media outlets and here's why they would want more clicks or more
negative stories. Negative headlines generate more engagement. More engagement generates more traffic.
More traffic generates more advertising revenue. So the new ecosystem naturally rewards negativity.
Even if the underlying events are not necessarily that negative. Now let me be very, very clear.
What's happening in the world at the moment is horrible. I am not trying to diminish what's
occurring in the Middle East and how that's affecting people here in New Zealand as well.
By all means, not diminishing that whatsoever. The only point that I'm really getting
out here is to try and help people that might be feeling a bit of anxiety when reading all
these headlines and considering their kiwi saver, their managed funds, their investment portfolios
and trying to decipher whatever they need to make a jerk reaction and change things to avoid
a loss and avoid a pain. If I can assist with that, there's the very least I can do. But please
don't see this message as on dismissing what's happening in the world and it's not important enough
to have any real causal effect. Let me focus back to that. What could be the impact? People would
be very tempted to read these stories and sentiment, go down rabbit holes, panic themselves into
making a big decision. I could absolutely understand how that could be the case. Very easy.
Here's the impact of making a bad decision. The impact of missing the best days between
2005 and 2024, for example, might I remind you the headlines that I read before where they got
it completely wrong, they were all between this time period. A common study looks at the daily
S&P 500 returns from roughly 2005 to 2024. Very, very, very common study. What they found is a
fully invested average annual return would have been about 10.6% per year if you were just invested
in the S&P 500 and an index tracking fund. However, if you missed the best 10 days of that entire
time period, just 10 days, your return has moved from 10.6% to 6.4%. If you missed the best 20 days
in that time period, you're now down to 3.7%. If you missed the best 30 days in that time period,
your return has now been reduced to 1.9%. That's a huge, huge difference. If you consider what
inflation had done during the same time, just missing the best 30 days would have had your money
going backwards as opposed to receiving a 10.6% return. The source for this was JP Morgan Asset
long-term market studies using the S&P 500 daily returns. That just means that missing just 10 days
over 20 years cuts your annual return almost in half. Why this happens? About 78% of the markets best days
occur during bear markets or all the early stages of recovery. The exact time investors are most
likely to exit the market as often right before the strongest rebounds. To put this into a financial
frame, I guess, and put some money to this one, at least just imagine that you were over that same
time period investing $1,000 per month for the 20 years. If you were fully invested for the entire
time period doing $1,000 a month, your final portfolio value would be about $765,000.
If you missed the best 10 days of that 20-year period, your final portfolio value,
you're down to $460,000. You lost $305,000. That's nearly 40% of the wealth they're gone.
To put that into a goal perspective and where that might align with your goals,
to reach the same $765,000 figure that you would have if you were fully invested,
you might need to invest for another 9-10 more years. Missing a handful of major market rebounds
could delay a retirement goal by nearly a decade. Imagine the difference of 65 and 75,
the things you could have done over those 10 years while your health's still allowed.
I hope this information is helped. Whether it helps settle some nerves, some people that might
be on the fence, whether it is a friendly reminder for people that have heard the message before,
but just needed to hear it again right now of everything that's going on. Whether it's a resource
that you could potentially send to a friend or a family member that is explaining that they're
starting to feel this way as well, I hope it can have some positive effect on people that are
feeling a little bit anxious or worried about what's happening in the world and how it could affect
them. If I could give one key takeaway from today, I guess that would be that if you are feeling
this way, if you do have some anxiety, some worries, some fears, some concern, completely normal,
absolutely natural, a lot of people feel the same way. The media's stories are quite often
designed to make you feel that way. You have now engaged with their story more. You might have
even gone back and read it for a second or a third time just to confirm to yourself that what
you are reading is from a credible source. If you are in that position, all I urge you to do is
to reach out to your financial advisor and just ask them for half an hour to chew the fad on the
current state of affairs. If you don't have a financial advisor, very easy to find one. Have a
Google go on to sorted.org. There'll be a list of financial advisors. If you think you'd like to
catch up with myself, whether you have a portfolio with me or not, if you just need to sit down
and chew the fat because you are facing some anxiety, please pick up the phone, reach out,
get some help, get some guidance, get pulled back to what's actually important to you, what your
goals are and making smarter financial decisions to help you get those outcomes. As for this week,
it's us.
