In a new project at Bloomberg I will interview some of Wall Street’s most influential thinkers. I’ll share more details with readers when we get closer to a launch date, but several consistent themes have become clear to me, even at this early stage.
The one I want to discuss this morning is the concept of noise.
Longtime readers of mine will recognize this theme from years ago. “Lose the News” is now almost a decade old; more recently, I discussed how to “Reduce the noise levels in your investment process.”
In speaking with strategists, money managers, economists and analysts one pattern that rapidly revealed itself was the schism between the commentariat and the markets. The noisy, click-hungry, traffic-seeking headlines of the online and TV financial news media often have a very different tone, focus and punch line than what is going in equity and fixed-income markets themselves. Indeed, the divergence between markets and the coverage is a key takeaway from these interviews.
I can’t emphasize enough the problems that investors succumb to due to the human love of narrative (see this and this). We can find smart articles and insightful commentary online, but when taken in its totality it is little more than a cacophony of headlines, conspiracy theories, invalid logical arguments and other distractions. It is impossible to keep up, much less debunk, the never-ending series of myths produced by the noise machine.
Here is a perfect example: U.S. equity markets hit bottom more than five years ago. The rally since then has produced a gain of about 175 percent and counting. During this run-up, the noise has led readers to expect the coming collapse back into the abyss and recession. The Federal Reserve’s zero-interest policy and quantitative-easing program were going to turn us into a third-world nation. That then morphed into how overpriced the equity markets had become, followed by a series of bubble arguments. Then about three years ago, the doomsters began saying the market had reached a top. The bull move was all but over, get out now before the next crash. It’s 1987! No, it’s 1929!
Yet the entire time, the markets have continued to rise.
Why is that? Markets respond to a variety of factors: Sentiment, valuation, liquidity, trend, demand, risk appetite, etc. At any given time, one or another of these, or some combination of them, is dominant.
The noise on the other hand merely reflects whatever meme is popular at that moment. The commentariat often resembles a hall of mirrors, with both good and bad thoughts and ideas getting bounced around and reflected continuously. Only on rare occasions, does the net result correlate with what is actually occurring in markets. Those instances seem like coincidences.
What purpose does all this noise serve? My conclusion after speaking with thoughtful, data-driven people is that its main purpose is to help create a two-sided market.
What noise are you listening to?