Bad timing?! – The magazine cover indicator

The human psyche often stands in the way of retail investors achieving success, but finance pros and financial journalists also aren’t immune to the pitfalls of (crowd) psychology. Prominent cover stories in financial and news magazines are often a reflection of moods and positionings on the global stock market merry-go-round. The magazine cover indicator has a remarkable track record and belongs in every investor’s toolbox.

Financial markets are not an easy game

The average retail investor frequently gets talked about less than flatteringly. It often gets said that he hangs on to losers in his portfolio for too long and sells winners too soon (disposition effect), puts all of his eggs in one basket (lack of diversification) and trades too much (overtrading), follows the crowd (herd instinct), and chronically suffers from FOMO, a general fear of missing out on something – profits to be more precise. Retail investors often also try to time the market, an endeavor that very few ever get right. Given all of these investor errors, the Quantitative Analysis of Investor Behavior study published annually by US-based analytics firm Dalbar Inc. regularly comes to the conclusion that the average do-it-yourself investor ultimately earns several percentage points less than he or she would simply by investing in the broad S&P 500 index. The findings of this analysis, mind you, apply to the USA, but it is unlikely that investors in Europe behave much differently. However, it has to be conceded that the alleged “pros” often don’t do a better job of it than retail investors do. New investment products regularly get launched precisely at the moment when an asset (class) has already been performing very well or a new story has been circulating or a new trend has already been in place for a while. This category includes, for example, the ETFs on SPACs (special purpose acquisition companies) that came out in late 2020 and the equity baskets on the Metaverse theme that were rolled out in summer 2021.

Regularly procyclical? | Buy high, sell low (by financial pros)

Bitcoin price in US dollar

Sources: Bloomberg, Kaiser Partner Privatbank

The magazine cover indicator

The fact that investment products of that ilk regularly come onto the market “too late” is thoroughly understandable. A trend or theme first has to be discovered by a wide public and by a supplier of investment products. It then has to be “manufactured” into an investable product, and finally the marketing machinery has to be fired up. All of that takes time – time during which the news about an investment idea and its return potential usually already gets priced in on the market. It’s the same with the output from financial journalists, the third category of participants riding on the stock market merry-go-round alongside retail and semiprofessional investors and full-time pros. A story must first gain a certain degree of currency on the market or in society. Then it has to be researched, drafted, and written before it maybe makes it onto the cover of a financial publication. By the time the story finally gets published, the topic or theme it addresses oftentimes has already become old hat. What’s more, with astonishing frequency, flashy magazine covers and eye-catching cover stories often mark the climax of a hype or a nadir just before a turn for the better. This phenomenon has a name both simple and apt: the magazine cover indicator. To this day, the legendary cover of the August 13, 1979, issue of BusinessWeek heralding “The Death of Equities: How inflation is destroying the stock market” is considered a textbook example of a sentiment barometer with a contraindicative signaling function, though somewhat unjustly in this instance because although the publication of this cover story was followed shortly thereafter by a big equity bull market that lasted until the turn of the millennium, it took only around three more years (and an inflation-adjusted 32% plunge in the Dow Jones index) for the US stock market to reach its definitive bottom. So, this reputed reverse indicator actually wasn’t one at all in this notorious case.

World-famous… | …for the wrong reasons

Cover of August 13, 1979, issue of BusinessWeek

Sources: BusinessWeek, Kaiser Partner Privatbank

Astoundingly high accuracy rate

Nevertheless, it’s not for nothing that the magazine cover indicator enjoys a certain renown. Nobel economics laureate Paul Krugman once quipped that “whom the Gods would destroy, they first put on the cover of BusinessWeek.” There certainly are anecdotes consistent with that statement, albeit in examples involving another prominent US news weekly, TIME Magazine. TIME chose Amazon founder Jeff Bezos as its person of the year at the end of 1999 at the height of the dotcom bubble. Amazon’s stock then went on to lose more than 80% of its value the following year. Something similar recurred 22 years later. At the end of 2021, it was Elon Musk who adorned the cover of TIME as the magazine’s person of the year – 12 months afterwards, Tesla’s stock price was down by two-thirds. Citigroup analysts Gregory Marks and Brent Donnelly dug up more than just isolated evidence in 2016. They searched back issues of the financial magazine The Economist for visually impactful cover stories with a very distinct optimistic or pessimistic message. They found 44 covers spanning a period from 1998 to 2016 that fit this bill. Of those 44 cover stories, 68% acted as a reverse indicator in the space of a year, meaning that if you had consistently bet on the opposite of the magazine’s recommendation or storyline, you would have bet right in two out of three cases. Last year Brent Donnelly reprised this analysis using 54 cover stories in The Economist and eight standout issues of TIME. This time he augmented the study with performance data and differentiated between bullish and bearish covers. In this investigation as well, more than half of the cover stories acted as a reverse indicator after a year. Bets against the 39 bearish covers were up 13% on average in performance terms a year after they were published. But the amazing thing was that the contrarian bets against the 23 bullish cover stories also had a high 60% accuracy rate and resulted in a positive performance – investments in line with the stories were down 8% on average one year later. This is remarkable because sentiment indicators usually work well particularly when bearishness overshoots. When that happens, markets then are often heavily oversold and most investors have already unloaded stock holdings, so a retracement rally sets in sooner rather than later in any case. The situation is different in very bullish markets in which investor euphoria becomes ultra-exuberant and expectations of rising prices can turn into a self-fulfilling prophecy – this momentum causes sentiment indicators to malfunction as a reverse indicator.

Regularly procyclical! | Buy high, sell low (by financial journalists)

Crude oil price and cover of The Economist

S&P 500 index and cover of The Economist

Sources: Bloomberg, Kaiser Partner Privatbank

Useful, but not easy to use

The magazine cover indicator thus can deliver a better-than-average and timely warning signal especially during periods of exuberant euphoria, but it is not a holy grail. For one thing, despite its high accuracy rate, the indicator is still wrong often enough. Moreover, the many biases described at the beginning of this article that often cloud the views of retail and professional investors will likely make it hard for them to practically implement the indicator signals in their investment decisions. But perhaps it also suffices just to be aware of the effect that cover stories and visually impactful cover images have. If you come across them, you should be sensitized to them and should at least critically question the story. This often helps a person view the frequently turbulent world of finance and certain themes in a more relaxed state of mind, for example when perusing the cover of an issue of The Economist from June 2023. Its title – “The Trouble with Sticky Inflation” – should give anyone who fears persistently high inflation rates some relief.

Bad timing… | …even on inflation?

Cover of the June 24, 2023, issue of The Economist

Sources: The Economist, Kaiser Partner Privatbank