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The growing influence of "investotainment"
Friday’s stock market reaction to the inversion of the US Treasury yield curve provides a lesson in how to not consume financial news. CNBC, Bloomberg TV and other business news networks are sometimes called “Bubble TV” because of their propensity to exaggerate existing market trends. CNBC was launched in 1989 and Bloomberg TV in 1994. During the tech bubble at the end of the 1990s these two niche channels became popular with a wider audience as stock markets rallied and an increasing numbers of retail investors engaged in stock trading. This created a need for real-time access to market news without having to pay for institutional data providers. Besides, CNBC and Bloomberg TV are so much more entertaining than watching data on a Bloomberg or Reuters terminal.
After the tech bubble burst, academic interest in the connection between business media and stock markets peaked and one study showed that analyst views broadcast on CNBC lead to higher trading volume within seconds of the company being mentioned on TV. Note here that we are not talking about fundamental information, but instead about views of individual analysts which can be right or wrong. Within one minute of an analyst espousing a positive view on a stock, the share price had fully incorporated that view – or rather, the view of the analyst had been amplified so much that stock prices did no longer react to it afterwards. Business news channels created positive price momentum on favourably reviewed stocks. And since most stocks reviewed by analysts and on TV are reviewed positively, business TV channels tend to push stock markets higher in normal times.
In a separate study, Paul Tetlock found that in those cases where market commentary was negative, trading volumes also increased, and prices declined. Thus, in a bear market, when most market commentary tends to become negatively biased, markets experience more persistent downward pressure due to media coverage of the market.
These studies provide one of the many reasons why I do not watch CNBC and do not read the Financial Times or the Wall Street Journal. There is no news in their reporting that is useful for investors or research analysts. To the contrary, the risk is that by exposing oneself to the “investotainment” providers like CNBC or the more serious outlets like the Financial Times, one gets caught up in the sentiment swings of the broader public and ends up being something that academics euphemistically call “noise traders”.
And successful investors ignore the noise rather than pay attention to it.
Obviously, none of this is new, but what strikes me is that the influence of the media seems to have become larger over time. Today, we may no longer rely predominantly on the Financial Times or CNBC, but on a whole ecosystem like “Finance Twitter”, i.e. a host of influential accounts on Twitter and other social media sites that promote snap analysis and insights on financial markets.
On Friday, when the US yield curve inverted for the umpteenth time in the last couple of months, Twitter exploded with comments like “the yield curve inverted, but this time for real”, referencing the fact that this time the inversion happened between the 10-year and 3-month yield and not between more esoteric parts of the yield curve. This event triggered an almost instantaneous shift in market sentiment and accelerated the sell-off. In fact, going back to 1970, the decline of the S&P 500 on Friday was the biggest decline on the day the yield curve inverted over the last fifty years.
In our chart, we show the reaction of the S&P 500 on the day the 10-year Treasury yield dropped below the 3-month Treasury yield for the first time. After each of these days, we added a 12-month blackout period because oftentimes the steepness of the yield curve fluctuated around zero for a while, creating several days of seemingly new yield curve inversions. Ignoring these “inversion echoes”, we can see that until the late 1980s the immediate market reaction to a yield curve inversion was all over the place, ranging from -1.15% in 1981 to 4.0% in 1978. Since the 1990s, however, the immediate market reaction has been negative, except during the height of the tech bubble in 1998. And over time, it seems that the negative market reaction is getting worse, indicating that there may be an increasing number of “noise traders” in the market that create excess volatility and amplify the negative news associated with a yield curve inversion.
This, in my view, creates two lessons to heed. First, we should expect market swings to become more pronounced in the future, with bubbles growing bigger and lasting longer than in the past and similarly, crashes becoming more severe in the future. Second, the “alpha” one gets from avoiding Bubble TV, Finance Twitter and other amplifiers of noise is increasing as well. While more and more people get caught up in the short-term market action, the calm, long-term investor can provide liquidity when markets panic and sell as markets become more overvalued.
Market reaction to yield curve inversions
Source: Bloomberg, Fidante Capital.