29 Jul 2018
Remember last year when most financial commentary was saying that market volatility was too low? That was a pretty unusual state of affairs.
Most of the time market commentary presents us with a very different picture of markets. Asset prices “plunge,” “plummet,” “sink” and of course “crash.” Or they “soar,” “surge,” and “jump.” Most who pay only passing attention to the investing world would be forgiven for thinking that markets are highly volatile all the time.
Last week we saw some good examples of this. Facebook and Twitter saw declines of around 20% each on Thursday and the clichés were out in full force. Simply searching for the word “plunge” in Google news revealed its prevalence.
In this case, this use of language might be justified. Facebook’s decline was the largest one-day loss in US history (in terms of market capitalisation, not percentage) and any investor losing 20% in a day would be extremely worried. Unsurprisingly, the moves were described as a ‘rout.’
However, context is important. The Twitter move only takes the stock price back to where it was at the end of May (and still up over 40% year to date), and Facebook back to where it started the year.
Nor should anyone be surprised by such moves. I wrote briefly in April about why we should expect the volatility of these stocks to be high in general (‘pricing model uncertainty’). We may add – if we believe that markets have a propensity to be driven by human forces – that the very nature of the rapid increase on little news that these stocks had already enjoyed left them more than usually vulnerable to this type of setback.
Perhaps less appropriate was the characterisation earlier last week of Japanese government bond yields ‘surging’:
Again, we can make a case for the significance of the move. In the context of a yield that the Bank of Japan is seeking to fix the news may be material, but yields only reached levels seen at the start of February. From a longer-term perspective, the shift is barely a blip.
This doesn’t mean that the move isn’t important. That even simple speculation about a change in policy can prompt signs of panic may illustrate the fragility of investor beliefs, but the move itself will be immaterial to most investors.
The type of language above is not limited to finance. In May, UK writer and broadcaster Jonathan Meades touched on how language is used in the media to try to create a sense of urgency, and how words that we would rarely if ever use in real life can become media clichés. (This is evident in financial commentary, I have never heard anyone describe a stock as ‘plunging’ or ‘soaring’ outside of financial news channels or financial articles.)
Unfortunately, what may only be irritating when it comes to other news coverage can adversely impact our perceptions and decision making when it comes to investing.
Academics have suggested that when price information was accompanied by explanatory ‘news’ about business conditions, investor performance was worse. A paper in 2005 also observed how market commentary tended to use images of deliberate action when markets were rising (‘climb,’ ‘jump,’ ‘soar,’ ‘leapt’) but more passive language when they fell (‘slid,’ ‘plummeted,’ ‘plunge’). The authors suggested that humans tend to subconsciously interpret the former as implying that the trend is likely to continue, whereas the latter is temporary.
These arguments may seem a bit of a push, but they are consistent with a host of evidence that show how the way information is presented to us shapes the way we interpret it.
Most clearly, descriptions of markets as forever ‘leaping’ or ‘plunging,’ being ‘routed’ or ‘roiled’ create an emotional response. They can serve to heighten our natural tendency toward fear, panic, or excitement.
This impact will be magnified for those who have limited interaction with markets (i.e. most of the population). Because most finance is perceived by many to be boring, it is unlikely to gain coverage unless events are extreme. Moreover, the way that humans consume and produce media means that there is a tendency to emphasise the negative. This is why we tend to hear about job layoffs and the death of the high street or about ‘billions being wiped off the stock market,’ but less about jobs created or increases in market capitalisation when stocks rise.
Most can therefore be forgiven for thinking that markets are highly chaotic places and why investing is a ‘rollercoaster’ (another cliché). This can be dangerous, non-professionals may be put off from investing for retirement, while all of us may have our time horizons shortened by the exaggeration of short term moves. Greater education and discipline will be the key if we are to maintain a sense of perspective.
Stuart Canning is a research analyst for the M&G Multi Asset team and is editor of the Episode blog.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.