A Stat for Every Story

The investment industry, like all others, has been transformed over the past few decades.

For instance, data was one of the biggest problems faced by an investor operating in the mid-1900s. There were fewer sources of news and information. There were no recorded and transcribed quarterly earnings calls. And there surely were no computers.

Obtaining reliable data back then took what investor Philip Fisher called “scuttlebutt.” Scuttlebutt, as Fisher described in his classic book, “Common Stocks and Uncommon Profits,” entails requesting and reading financial statements for a company, talking directly with company management, calling suppliers and competitors, and even reaching out to former employees of the company to construct an accurate picture of the company’s current state of affairs and future prospects.

It took a lot of work and tremendous amounts of time.

Those tasks are now immensely easier.

Company financial statements can be summoned on the Internet in seconds. Financial media outlets blast all day, every day. Even finding suppliers, competitors, and former employees is now far quicker and easier with the help of social media.

Back in the mid-1900s, the challenge was a lack of information. Today, the investor’s chief problem may be too much information. Data is everywhere.

We have statistics on the most bizarre things imaginable. Case in point: Did you know that the average annual return of the S&P 500 has been 10.7% over the last 30 years? However, when an American model has appeared on the swimsuit cover of “Sports Illustrated,” the U.S. stock market returns jump to 13.9% annualized. And when a non-American model is front and center, returns drop to 7.2%.

If you think swimsuit models have any impact on the stock market, well, I can’t help you, and trust me, neither can the editors of a swimsuit magazine edition.

There is so much data that you can find a fact to fit any narrative, any market perspective.

This week proved just that. The Federal Reserve cut interest rates by half a percent. What does that mean for the stock market? How should you position your portfolio in light of that decision?

It depends. What story do you want to tell?

The “stocks are going up” crowd can point to a couple of stats offered by J.P. Morgan: “Since 1980, five of the 10 best years for the S&P 500 happened when the Fed was cutting rates without a recession. The Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high. The market was higher one year later all 12 times (with a median return of 15%).”

The “stocks are going down” crowd also has some ammunition, though. Wells Fargo calculated that since 1974 stocks have declined around 20% in the 250 days following the first Federal Reserve rate cut.

The casual reader may not have caught the subtle differences in the stats used to justify those two opposing market views. J.P. Morgan used data starting in 1980 and looked at returns one year later. They also confined their data set to instances in which there was no recession at the same time interest rates were lowered. Wells Fargo’s data started in 1974 and included all environments, including recessions, and measured performance 250 days after the first Fed cut.

As investment blogger Ben Carlson is fond of saying, “You can win almost any argument about markets by changing your start and end dates.”

So which forecast is right – J.P. Morgan’s or Wells Fargo’s? Truthfully, I have no clue. But if you own stocks, it shouldn’t matter. The best stock investors are never all-in or all-out. They are far more measured. They withstand the ups and downs of all market environments; they don’t attempt to sidestep them.

If you’re listening to talking heads about how to position your portfolio, you’re toast. No one has the answer. The arguments may sound logical and entirely convincing, largely because they will trot out actual data to support their narrative.

But you’re too smart to fall for that. You know there’s a stat for every market story.