Reading market and economic news critically

In simple terms

Financial news is written fast, for attention, by people who must explain every move. Much of it is useful; much of it is noise. A few habits help you get the useful part without being stampeded by the rest.

Data and interpretation

Most stories mix two things:

• Data: the index fell 1%; inflation was 5.4%; a company's profit rose 12%.
• Interpretation: "on fears of a slowdown", "as foreign investors fled", "signalling a turnaround".

Data can be checked against its source. Interpretation is someone's opinion, often written after the fact, as the expectations and surprises lesson explains. Read them separately.

Points and percentages

Index moves are often reported in points, which sound dramatic when the index is at a high level.

As indices rise over the years, the same percentage move means more points. Always convert to percentages, and compare with what is normal: broad indices move by around 1% on many days without anything unusual happening. Words like "crash", "bloodbath" and "soars" are chosen for attention.

Check the figure

For any economic or company figure, ask:

1. Who produced it? An official statistics body, a company, a broker, a survey, or an anonymous post?
2. What period does it cover, and what is it compared with? Month on month, year on year, or since some chosen date?
3. Is the base unusual? Large growth from a low base is a base effect, as the measuring inflation lesson explains.
4. Percentage or percentage point? A rate rising from 4% to 5% is 1 percentage point, or 25%.
5. Is it a first estimate that will be revised, as GDP figures are?
6. Was the period cherry-picked to make a point, as the misleading statistics lesson explains?

"Markets fell because..."

Daily market reports almost always give a cause. But on any day, many things happen: global markets move, data is released, companies report, and large investors buy or sell for their own reasons. The chosen cause is usually the most convenient story. Signs to be sceptical:

• The same cause is used to explain a rise one day and a fall the next.
• The cause was known before the move.
• Several different causes are offered by different outlets.

Many daily moves have no single cause worth acting on.

The limits of economic indicators

• Revisions: early figures change, sometimes a lot.
• Seasonality and festivals: monthly figures in India swing with the calendar, as the employment and consumption lesson explains.
• Partial coverage: many indicators miss the informal economy.
• Noise: one month rarely marks a turning point.

A short checklist before acting on news

1. What exactly happened, in numbers, from the original source?
2. Is it better or worse than expected, and is it already in the price?
3. Does it change the long-term value of what I own, or only today's mood?
4. Would I act on this if I had not seen the headline?
5. Does acting fit my written plan, as the investment policy statement lesson describes?

Most of the time, the honest answer is that no action is needed.

Why it matters

News drives emotions, and emotions drive many investment mistakes, as the herding lesson explains. Reading critically protects you from overreacting to noise, misreading statistics and following stories that are already priced in.

Limitations

Some news does matter: fraud, a change in a company's business, a major policy change. The aim is not to ignore news but to judge which items change long-term value. Even careful readers will sometimes be wrong.

Common mistakes

• Reacting to point moves without converting to percentages.
• Believing the day's explanation of why the market moved.
• Reading interpretations as facts.
• Acting on news that is already widely known.

Try it yourself

1. Take three market headlines from today and separate the data from the interpretation in each.
2. Convert any point moves to percentages.
3. For one economic figure, find the original release and check the comparison period and any revisions.
4. Note whether anything you read would change the long-term value of your holdings.