Magazines' rosy outlooks often followed by market downturn
NEW YORK -- When United-ICAP analyst Walter Zimmermann set eyes on the big, boldface, tabloid-esque headline "DOW 15,000" on the Feb. 13 cover of Barron's, it was akin, he says, to a black cat crossing the path of stock investors.
The next day, he e-mailed a report to clients warning that the respected financial weekly's upbeat story — which laid out why the 3-year-old bull market had more room to run — might be signaling just the opposite. Citing history, he argued that the bullish message splashed on the cover of Barron's was a textbook contrarian signal showing that investor optimism was getting too euphoric. Zimmermann concluded that all the ingredients were in place for a "major, world-class top" in the stock market.
Bullish cover stories, Zimmermann's extensive research shows, are more akin to a Wall Street curse. A sign of coming bad luck. A warning flag.
Zimmermann bases his bearish reaction to the bullish story on what he dubs the "Cover Story Syndrome."
"History has shown," he says, "that by the time a financial trend has lasted long enough and been powerful enough to make it onto the front page of a magazine, that trend is typically ending, (is) already over or has already reversed direction."
Often, what has been flying the highest is also at risk of falling the hardest. The "cover curse" is not just tied to the stock market. Bullish cover stories related to oil, the U.S. dollar, gold, individual stocks, hot companies, superstar CEOs, even elite athletes, often portend topping action. The reason: Cover stories are always super-bullish at the top or at times of peak performance.
The Dow has doubled since its bear market bottom three years ago and would have to rise another 12.7% to reach 15,000. The night before the Barron's story touting Dow 15,000 hit newsstands, the Dow closed at 12,801. It's currently trading roughly 300 points higher at 13,091, after dipping as low as 12,716 in early April.
Outlier performances by stock indexes, companies and sports stars are hard to sustain, setting big winners up for a fall. All sublime performances are subject to "mean reversion": At some point, the outperformance ends, and more-average performance returns.
The risk for investors is that they may get overly confident after reading optimistic cover stories, let their guards down and dive into the stock market, even though the bulk of the big move up has already occurred, says Price Headley, chief investment strategist at BigTrends.com.
"Regular investors say to themselves, 'This is a great time to buy,' " says Headley.
A better time to buy, Headley says, is when there is "maximum pessimism and fear," and the media is running stories that warn of impending doom. The best example is the infamous BusinessWeek cover story, "The Death of Equities," that ran in its Aug. 13, 1979, issue. Stocks, of course, were about to start a two-decade bull run.
Bob Dickey, of RBC Wealth Management, noted in a report that stocks "voted most popular" by the press tend to be near the end of their rallies.
• A Time magazine cover at the height of the Internet boom in December 1999 that named Amazon CEO Jeff Bezos as "Person of the Year" also marked the peak of Amazon's stock in that market cycle. The online retailer hit an intra-day high of $113 in mid-December 1999, only to fall to a low of less than $6 a share in late September of 2001.
Omens and warnings?
Trending Reader Picks
ABC News Live