Disentangling market messages

24th January 2012

The S&P 500 has proved bullish, although analysts are generally cautious about its outlook, reports the Financial Times (paywall). Meanwhile, the FTSE slipped from a six month high yesterday, say reports, with Greece still unable to seal a deal with private creditors.

Alternatively, the Vix index, measuring how much investors will pay to protect against volatility on the S&P using options, is back to implying confidence.

However, ten-year Treasury bonds are yielding barely above 2%. In July last year, they were yielding more than 3%. And low bond rates suggest pessimism over prospects for recovery.

Then there is a range of data. For example, take employment data – US unemployment data has shown an improving trend, but this is mixed with news of mass job losses while high street retailers like Peacocks continue to go bust.

What about forecasts? Are they the guiding light?

Nick Kirrage, manager of the Schroders Recovery Fund, says on his Mindful Money blog that the asset manager is not "universally complimentary about macroeconomic forecasts, but we are hardly alone in this." After all we did not come up with the line: "Economists have correctly predicted nine of the last five recessions", we just happen to think it's quite appropriate.

 "…Of course, it would be foolish to argue that economists stop making forecasts. In reality, everybody needs to plan for the future and it's necessary to have a base case on which to plan, demanding some form of guess about the future. However, this needs to exist alongside the knowledge that whatever forecast is made will almost certainly be wrong and thus other scenarios, potentially extremely different to the central case, must also be considered."

But what action are investors taking – and what does this indicate?

Shifts in favour of riskier stocks are a good clue that a true recovery is under way.

But no such shift is happening, says Simon Ward, head of economics at Henderson. On his Mindful Money blog he writes: "World equities are up by 14% in US dollar terms from their early October low but Credit Suisse's global risk appetite measure has only just exited "panic" territory …On this measure, at least, "risky" assets are not yet overbought."

What about the wisdom of crowds for insight?

Making use of the collective minds of people around the world through social platforms may set us on the right path to knowing which way the market and economy will shift. 

Kim Stephenson, Mindful Money's psychologist blogger, says: "…I use the wisdom of crowds idea a lot in management development because it provides a lot more potential answers to real world problems than one person, however clever that one person is."

Psyfi blog says that Twitter may predict stockmarket movements and social media predicts investor sentiment. Reports suggest that there are already fund managers out there exploiting these ideas.

However, turning to Twitter may of course be more the stupidity of mobs rather than the wisdom of crowds.

Yet Psyfi blog says that the idea that a group of relatively uninformed people can converge on the "right" answer where a group of experts can't has been around for over a century and originated in an insight of Francis Galton, cousin of Charles Darwin and interested in measuring people. Famously Galton noted that a crowd of people were able to correctly judge the weight of an ox at a market because, even though no individual was able to exactly guess the answer, their predictions were correct on average. 

"Critical to wisdom of crowd models is that the individuals making predictions are independent of each other," it adds. "This has clear appeal in certain internet situations such as social media where people are clearly not making independent decisions."

So it seems taking opinions from a variety of sources and deciding on a balanced opinion as a result of research seems the best investment route. The internet is a great source of information for everyone – and particularly savvy investors seeking knowledge.

 

More from Mindful Money:

What can investors learn from innovative failures?

What investors can learn from the bible

Contrarian Investor – Betting against the noise

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