The Magazine Cover Jinx: Fading the Madness of Popular Press

Anecdotes can be unreliable

The problem with anecdotes is that they are prone to sample size issues, confirmation bias, and cherry picking. If you’re always bearish stocks, for example, you will see anecdotal evidence of a top almost every day. If you think Artificial Intelligence is a bubble, you will see anecdotal signs of overconfidence and tech hype all over the place. If you’re a crypto hater, you will find plenty of anecdotal reasons to get short crypto.

Some newsletter writers and commentators are infamous for finding daily anecdotal evidence that fits their priors, even as their view continues to be wrong year after year.

Anecdotal evidence is also prone to apophenia, which is humans’ predisposition to see patterns everywhere. See Chapter 7 of my book, Alpha Trader, for more on apophenia. For example, take a look at this stock market analysis using the anecdotal evidence of “Major Events in the Beatles Career” versus stock market performance:

Anecdotes can also be useful

While trying to incorporate anecdotal evidence into your evaluation framework can lead to biased decision-making, it can also give you a simple and potentially reliable way of measuring social mood and identifying peak narrative in an asset class. If you ignore anecdotal evidence, you ignore a potential canary. As a result, you may miss obvious warning signs of trend exhaustion and peaks or troughs in the zeitgeist/hype cycle.

Finding an empirical framework

I believe that anecdotal evidence is too important to dismiss and too unreliable and potentially biased to take at face value. You need to develop a systematic way to track and back test anecdotal evidence to see whether or not it has predictive power. With the Magazine Cover Indicator, this is fairly easy to do.

The Magazine Cover Indicator is a belief commonly held by financial market participants that when a financial story or market theme is displayed on the cover of a magazine, that theme or the related trend is near exhaustion. In other words, magazine covers are believed to be reverse indicators.

Two famous examples include when BusinessWeek’s cover screamed “The Death of Equities” during the stock market lows in 1979 and when The Economist proclaimed the world to be “Drowning in Oil” just as oil bottomed in 1999.

Two other notable representatives of the Magazine Cover Indicator are the appearance of Jeff Bezos as Time’s Man of the Year in 2000 just before the tech bubble burst and Russian President Vladimir Putin as Man of the Year in 2007, right before the collapse of oil brought down the Russian economy.

The premise behind the indicator is that when a periodical finally devotes a cover to a market trend, company, country or person, the story or theme has been in vogue for some time and is likely past its peak. Positioning and sentiment should already fully reflect the story on the cover of the publication and the story should be priced in to the investment opportunity. In other words, by the time a journalist writes about a trend, a majority of the move has already happened.

Also, there is mean reversion at work. Something has to move like crazy in order to make it onto a magazine cover, so by that point it’s almost surely overbought or oversold. Mean reversion is also what drives the Madden Curse, The Stadium Curse, and the Sports Illustrated Jinx. When something massively outperforms, it’s more likely to underperform in the future due to simple mean reversion.

The problem with an unscientific indicator like this is that it becomes a part of market lore. Traders remember when it works and conveniently forget when it does not. Selection bias and cherry-picking are a problem. Then, every time a new magazine cover hits, people assume it is contrarian, even when there is no data to back this up – it’s just something people assume is true. It is easy to point to a cover story and draw conclusions, especially in hindsight. The purpose of this article is to investigate the following question:

Do the covers of Time Magazine and The Economist have contrarian forecasting value?

In 2016, Greg Marks and I did a study on the Magazine Indicator and found that it has robust predictive power. With The Economist featuring the U.S. economy as “The Envy of the World”, I figured it was a good time to revisit the analysis.

Before I get into the study, I want to share an observation from combing through all those weekly covers of Time and The Economist from 1997 to now.

There is nothing new under the sun

Look at covers shown below. They are all at least 10 years old, and many are more than 20 years old.

Source: TIME Magazine Covers archive

Notice we are talking about all the same issues right now. Gun violence, screen time, online shopping and the hollowing out of small business, police brutality, racial inequity, vaccine hesitancy, data privacy, going to Mars, and the growing irrelevance of elite education. All topics a decade or two ago that still resonate today.

I could have shown more, too. Topics like climate change, America’s involvement in the Middle East, and optimal diets have yet to fade from the zeitgeist.

I encourage you to take a few minutes and have a gander at further examples. It’s a fascinating glimpse at recent history that offers a bit of perspective. The links for 1997 are here, you can click through, year by year.

Time 1997 covers

The Economist 1997 covers

Methodology

The choice of which covers to include or exclude is mildly subjective but the criteria I used are simple and objective. I think most people would end up with a very similar spreadsheet to mine if they did this task. The criteria for selecting a cover:

Cover selection criteria

1. Does the cover clearly reference a market theme, country or asset class?
2. Can an obvious contrarian trade be justified by this cover?
3. Does the cover unequivocally make a statement on direction? In other words, does the cover have a strong bullish or bearish message and/or image? If a cover is ambiguous, exclude it.
4. No individual equities.

Back testing methodology

1. Pick the asset class most connected to the cover story. For countries, use that country’s stock market.
2. Use Bloomberg data to see where the asset is trading one month, three months, six months, one year, and two years later.

Again, the process of choosing the covers has a subjective component but I’m confident that different people choosing the covers might change the results at the margin but would not change the overall message or direction of the results. I included all the data as an Appendix so you can have a look. Let me know if you see any issues.

 

Results

The first thing I noticed is that The Economist covers are much more bearish than bullish, with 39 negative covers and 23 positive. This is consistent with negativity bias in the media. Scary covers sell more magazines than happy covers – sad but true. Time Magazine covers are more balanced and offer more caveats than covers of The Economist. Also, Time is not a finance magazine, so the overall sample was just eight Time covers compared to 55 from The Economist. The overall sample is large enough that if you take out all the Time Magazine results, the output barely changes.

Here is asset price performance after a bullish or bearish magazine cover:

Takeaways

1. The most important conclusion is the same one I reached in 2016: Magazine covers are a good reverse indicator. The reversal starts pretty much right after the cover comes out (on average) and is strongest about a year later. The bearish covers are a stronger signal because most assets have been in a huge up trend since 1997. The fact that the bullish magazine covers yield meaningful bearish results is absolutely amazing in the context of the “bubble in everything” that has prevailed since 1997, when the Greenspan put was born. Most of the assets studied here have skyrocketed since 1997, so to find an indicator that yields meaningful bearish results is highly significant to me. I have done many of these types of studies, and the trend of the assets in question often dominates the output. Not here.

2. Speaking of bubbles… How do these covers make you feel? Fear sells. Negativity bias is well known, and the media uses fear to sell magazines. Scary stories sell magazines, even though (ironically) sophisticated traders see these as bullish reverse indicators, not actual scary things. (Note, the covers in 1999 were eventually correct as the NASDAQ bubble peaked March 24, 2000. Anyone trading off the advice of the covers would have been bankrupt long before the crash, though. The NASDAQ doubled from September 1999 to March 2000, after all three of those covers came out.)

3. Currencies on the cover of The Economist are contrarian but not as much as I thought. Also, note the asset moves in my study are not adjusted for volatility. Currencies are less volatile than the other asset classes, so they barely move the needle.

4. The Economist covers are shockingly bad on commodity direction. This could be a sample size issue or maybe it just takes an incredible amount of volatility and pain in commodities before they show up on the cover of the Economist. You can see this in the ludicrous contrarian returns in the tables above. The fact that the covers work in both directions adds to my strong belief this is definitely not random. Below, I present a brief visual history of The Economist’s oil-related covers.

Time to fade the dollar?

The Economist has not been a great contrary indicator recently, despite consistently batting around 65% as a contrarian indicator on a 1-year time horizon both in sample and out of sample back to 1997. See one of their most recent covers:

One could argue this is a bearish USD cover because the greenback is flying up like a SpaceX rocket, but I decided the story is about the U.S. economy and the pure play to go against the magazine cover and short the U.S. economy is to go long bonds, not short the USD. As such, Magazine Cover Capital (the fictitious entity I created to track these trades in real time, starting in late 2021) is going long the iShares 20-Year Treasury Bond ETF (TLT), a long-term U.S. government bond ETF.

The portfolio was already long some bonds (via TLT) and in the money on the back of a March Economist cover: “America’s Pumped-Up Economy” featuring a buff American flag-turned-bodybuilder in a hideous white Speedo.

See below for all the trades that followed the original study, going back to 2021.

In sum, covers of The Economist and Time Magazine that point in a clear direction for a particular asset class are contrarian. They work as contrary indicators in both directions.

If you invest in the direction of a cover of The Economist, you should expect to lose roughly 10% of your investment in the year after it hits the newsstands.

Brent Donnelly, President of Spectra Markets, has been trading professionally since 1995 and is the author of Alpha Trader, The Art of Currency Trading, and 50 Trades in 50 Weeks. Brent has been a market maker, trader, and senior manager at some of the top bulge-bracket banks, and has extensive experience trading currencies, stock index futures, NASDAQ stocks, and commodities. A respected macro thinker with the unique perspective of a senior risk taker, Brent writes the daily macro newsletter am/FX and Friday Speedrun.

Brent’s decades of experience have now been distilled into Spectra School’s flagship course, Think Like a Market Professional. Drawing from lessons learned on the world’s largest trading floors, you’ll learn practical frameworks that professionals use to see markets more clearly, manage risk, and make more money.

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