July 24, 2017

Examples of the Narrative Fallacy

Examples of the Narrative Fallacy

In my earlier article on The Narrative Fallacy, I tried to explain in just 400 words how and why our brains mislead us, not only in finance, but also in science, news, religion, philanthropy, politics and life in general. In that article I wrote:

Movements in the stock market, up or down, don’t have a single cause. Market prices are the result of billions of shares of stock being bought or sold. Such volume has millions of causes. And very few of those causes coincide with any given narrative that you might hear through news sources or financial professionals.

To illustrate that principle, I analyzed a week’s worth of “Morning and Midday Market Views” provided by the Schwab Center for Financial Research. Note the implied or sometimes explicit claim of cause and effect simply because two things happened at approximately the same time.

I have marked:

  • the synonyms used for “coincidentally close to the same time as” in green;
  • the phrases they use which have an even stronger claim of understanding people’s motives and implying a known cause and effect in orange;
  • and the words where they admit that the markets are actually moving in the opposite direction than the narrative would have suggested in red.

Morning Market View for September 19, 2016

U.S. stocks are moving higher in early action, with a recovery in crude oil prices helping boost the energy sector, though global caution is lingering ahead of this week’s key monetary policy decisions from the Fed and Bank of Japan. Treasuries are little changed, while the U.S. dollar is losing ground and gold is higher before a read on homebuilder sentiment in September. Asian stocks finished higher with Japanese markets closed for a holiday, while European equities are advancing on strength in energy and mining issues.

Midday Market View for September 19, 2016

Domestic stocks are gaining ground, following an advance in Asia and as European equities are rebounding, with crude oil prices recovering to boost the energy sector. However, conviction appears to continue to be constrained ahead of monetary policy decisions from the Bank of Japan and Fed on Wednesday. Treasuries are dipping and gold is ticking higher, while the U.S. dollar is losing ground, despite a jump in U.S. homebuilder sentiment. Sarepta Therapeutic is surging after the FDA granted accelerated approval of its drug to treat for Duchenne muscular dystrophy.

Morning Market View for September 20, 2016

U.S. stocks are higher in early action, despite a softer-than-expected read on domestic housing construction activity and lower crude oil prices, along with global caution ahead of tomorrow’s highly-anticipated monetary policy decisions from the Fed and Bank of Japan. Treasuries, gold and the U.S. dollar are higher. Lennar topped quarterly earnings and revenue forecasts, though new orders missed, while Steel Dynamics issued disappointing guidance. Asian stocks finished mixed, and European equities are mostly higher.

Midday Market View for September 20, 2016

Domestic stocks are nudging higher, even as U.S. housing construction activity missed forecasts and crude oil prices are seeing some pressure. Global conviction remains constrained by caution ahead of tomorrow’s monetary policy decisions from the Fed and Bank of Japan. Treasuries, gold and the U.S. dollar are higher. Lennar topped quarterly earnings and revenue forecasts, though new orders missed, while Ascena Retail Group offered decisively lower guidance. Asian stocks finished mixed, and European equities are mostly higher.

Morning Market View for September 21, 2016

U.S. stocks are moving higher in early action, with Japan rallying to boost the Asian markets and European equities gaining ground, following the change of monetary policy direction from the Bank of Japan, while the markets await today’s policy decision from the Fed. Japan’s central bank moved to targeting the yield curve and committing to overshoot its inflation target, which is having a positive impact on the global financial sector. Treasuries are mixed and the U.S. dollar is dipping, while gold and crude oil prices are gaining ground. FedEx topped the Street’s quarterly and full-year expectations, while Adobe Systems exceeded profit projections.

Midday Market View for September 21, 2016

U.S. and European stocks are higher, with Asian equities getting a boost from Japan, even as the Fed’s monetary policy decision looms. Financials are getting a boost as the Bank of Japan changed its monetary policy, and crude oil is getting a boost from a bullish oil inventory report. Technology issues are up on Adobe Systems’ upbeat earnings report, while Dow member Microsoft raised its dividend and share repurchases. FedEx reported upbeat quarterly results and guidance. Treasuries and the U.S. dollar are dipping, while gold is gaining ground.

Morning Market View for September 22, 2016

U.S. stocks are higher in early action, following a rise in Asia and as European equities are extending yesterday’s advance, with the global markets digesting Wednesday’s decision by the Fed to hold off on raising rates. Treasuries and gold are rising, while the U.S. dollar is losing ground. Crude oil prices are extending their recent rebound. Bed Bath & Beyond and AutoZone posted mixed quarterly results, while domestic jobless claims unexpectedly fell, ahead of a key read on U.S. housing sales.

Midday Market View for September 22, 2016

Domestic stocks are higher, on the heels of an advance in Asia and as European equities are extending gains, with the global markets digesting yesterday’s Fed monetary policy decision to hold off on raising rates. Treasuries and gold are higher, while the U.S. dollar is seeing pressure. Crude oil prices are extending yesterday’s advance. U.S. existing home sales and the Leading Index declined, though jobless claims surprisingly fell. Bed Bath & Beyond posted mixed results, while AutoZone and Red Hat topped the Street’s earnings forecasts.

Morning Market View for September 23, 2016

U.S. stocks are trading lower, following a mixed session in Asia and as European equities are trimming a solid weekly advance on a disappointing read on eurozone business activity. The markets have gained ground this week amid mostly positive reactions to monetary policy decisions out of the U.S. and Japan. Treasuries and the U.S. dollar are little changed, ahead of a preliminary read on manufacturing output. Gold is ticking higher and crude oil prices are dipping amid uncertainty ahead of next week’s OPEC meeting.

Midday Market View for September 23, 2016

U.S. stocks are dipping on the heels of a mixed day in Asia and as European equities are mostly lower. Stocks are giving back some of the week’s solid gain that came courtesy of mostly positive reactions to monetary policy decisions out of the U.S. and Japan. Treasuries are little changed and the U.S. dollar is ticking higher, while a read on manufacturing activity unexpectedly dipped. Gold is slightly higher and crude oil prices are dipping. Twitter is rallying on a CNBC report that it may be close to getting a takeover bid.

Conclusions

These Market View alerts are the norm for the financial news and research industry. They encourage the narrative fallacy that we understand the cause and effect of market movements. They should be ignored because they encourage the mistaken idea that if the narrative persists, the market movement must therefore persist.

Photo used under Creative Commons Zero license.

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About David John Marotta

David John Marotta+ is the Founder and President of Marotta Wealth Management, Inc. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)

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