Heart-stopping markets and lying CEOs – 10 more stock market peculiarities
From donating money to politicians to appearing on magazine covers there are many odd indicators of stock market performance
Last week, we looked at 10 of the more unlikely findings into stock market behaviour. The list of market anomalies is a long one, however, with equity returns linked to dodgy politicians, football results and even Super Bowl adverts. Here are 10 more such examples.
Paying the politicos
Paying politicians pays off, countless studies show.
One US study examined more than 800,000 contributions to political parties from almost 2,000 companies over a 25-year period. The results were “quite startling”, the most generous companies beating the market by 2.5 per cent annually.
The best strategy was to donate modest amounts of money to as many politicians as possible, with annual returns boosted by 6 per cent a year. “Much like a venture capital portfolio of many start-ups, a few of the supported candidates will ‘pay off big’,” the study said.
A 2006 paper found the market capitalisation of a company increases by an average of 2 per cent when a large shareholder enters politics, the study examining 157 such announcements in 35 countries. A separate study found share prices fall by 2 per cent when a legislator “connected” to a firm – someone living in, or born in, the same city in which a company operates – dies.
Market timing isn’t easy – unless you’re a US senator. A 2004 study examining senators’ trading over a six-year period found they beat the market by 12 per cent annually. This was twice as good as company insiders, while money managers could not even match market returns during those years.
Stocks bought by senators “tended to stagnate prior to purchase, soar after purchase, and then stagnate again after sale”, the study found – “robust evidence” of insider trading.
Think analysts are a studious, objective bunch? Think again. Only 35 per cent say the profitability of their recommendations is crucial to their pay packet, a recent survey found. Nearly 40 per cent say they might lose access to management or be frozen out of conference calls if their earnings forecast was well below average. However, one in four has been pressured to lower earnings forecasts as it makes forecasts easier for companies to beat. “Most of the sell-side is worried more about what management thinks of them than they are about whether they’re doing a good job for investors,” one respondent admitted.
It’s reminiscent of a UBS analyst email that went viral last year. He described his notes as “mostly meaningless blurbs” that should be treated as “entertainment”, adding: “It’s easy to satisfy the handful of brain cells which occupy the sell-side banks.”
Chief executives are more likely to be lying if they use overly enthusiastic words as well as impersonal pronouns like “they” and “the team” rather than “I”, according to a Stanford study which examined almost 30,000 conference calls with analysts.
CEOs of companies that later restated earnings tended to use words like “fantastic” and “great” instead of “good”, and avoided negative words. They evaded direct answers and used general knowledge references such as “as you know” and “shareholders know”. Swear words were more common, while there were fewer “hesitation words” like “um” and “er”, probably due to “having more prepared answers or answering planted questions”.
Super Bowl ads
A company’s stock price rises if television viewers like their Super Bowl commercial, according to a study which examined 529 commercials aired from 1989 to 2005.
“This reaction is irrational because the stock returns were based solely on likeability of the commercials,” the researcher said. “If the likeability of the commercials caused a subsequent increase in company sales, a stock increase would make sense, but we did not find this to be the case.”
Contrarians have long used the so-called magazine cover indicator – the idea that an investment trend may be nearing its end by the time it is publicised on mainstream magazines – to guide their investment decisions making.
Mad? Not according to a study which examined 549 covers over a 20-year period. Stocks attracting the most negative covers subsequently trounced the most-favoured companies, while positive stories “generally indicate the end of superior performance”. Some of the most famous covers include BusinessWeek’s “The Death of Equities” cover in 1979; the Economist’s 1999 “Drowing in Oil” cover, which said prices were headed towards $5 (they hit $140 in 2008); and Time’s “Home Sweet Home” cover of 2005.
Havard MBA indicator
This long-term indicator gives a sell signal if more than 30 per cent of Havard Business School graduates accept “market-sensitive” jobs, and a buy signal if the percentage falls below 10 per cent.
A contrarian indicator that seeks to indicate when a trend has become stretched, it gave a record 41 per cent reading in 2008. Other strong sell signals occurred in 2000 and in 1987 – the year Black Monday occurred.
Buy signals are less common, the last one occurring in the early 1980s, when investors had given up on stocks and the Dow index was below 1,000. The all-time low was in 1937, when just 1 per cent of graduates entered the industry.
Pitch trumps trading pits
A study of 15 international stock exchanges during the 2010 World Cup found market trades almost halved when the national team was playing, with a further drop occurring if a goal was scored.
A separate study found World Cup losses led to a next-day stock market decline of 0.49 per cent. The effect was stronger in small stocks and in more important games, and also evident after international cricket, rugby and basketball games.
International stock markets have markedly lower returns when the clocks go back, according to a 2000 study co-authored by Prof Mark Kamstra. The “daylight-savings anomaly” may be due to heightened anxiety and risk aversion following sleep pattern changes, the study said.
The claim has been disputed by other academics but Prof Kamstra, who has also published research linking seasonal affective disorder with stock returns, says the anomaly “remains intact”.
Market volatility can be bad for your health as well as your wealth. A study published in the Journal of the American College of Cardiology found that a Nasdaq fall of 40 per cent was associated with a 36 per cent increase in heart attacks. Proportionally, the effect is more severe in China, another study finding that each 1 per cent move in the Shanghai Composite Index increased heart disease deaths by 5 per cent.
The findings, said analyst firm Sanford Bernstein, indicate volatility is as dangerous as high-risk heart patients not taking cholesterol-lowering drugs.