DON’T TRUST YOUR FIRST INSTINCTS
MARTIN SLANEY
HEAD OF DERIVATIVES, GFT
IN HIS latest book, Errornomics, journalist Joseph Hallinan has written about why we make errors and how we can stop them. When we take exams, he says, the perceived wisdom is to go with your first answer. Yet research from the past 80 years suggests the opposite – we should go with our second guess.
Last Friday’s non-farm payrolls report reminded me of this and of one of the most important rules of trading: look beyond the emotion.
The payrolls, which are the key employment indicator for the US economy, consistently cause some of the largest market movements of any release. Consequently they attract plenty of attention from traders and commentators alike. It is a veritable feeding frenzy for the media, who often relish in the opportunity on the first Friday of the month to whip up a storm of pre- and post-announcement hype.
This month was no exception. The surveys were expecting a loss of around 175,000 jobs in October and for the unemployment rate to rise to 9.9 per cent. The actual figures came in at -190,000, or 10.2 per cent. Poor numbers, right? Cue the instinctive reflex reaction of a sell-off in US index futures, pointing to losses of over 60 points on the Dow, and the rest of the world’s stock markets followed it down.
But history shows that the market’s initial response to the payrolls number is frequently reversed during the day’s trading session. This is particularly the case given the pent-up emotion that surrounds the payrolls, and even more so when there is more to the data than meets the eye. Anyone who looked beyond the headlines on Friday would have seen that the picture was far from the clear-cut one which the sell-off warranted.
We had a revision to the September payrolls figure with 44,000 fewer jobs lost than the initial release had suggested and the August data was revised higher too. This was a better net result than forecast and the realisation dawned that missing consensus by 15,000 jobs was not the end of the world. In any case this was only the second time in a year that the number had dipped below 200,000.
By the time the US equity markets opened, the wise ones who took a step back and digested the bigger picture were getting ready to step in. It took just 45 minutes of trading for the Dow to reverse the opening losses and turn positive.
We see this time and time again in the markets after a news release. So the message is clear: don’t trust your first instincts.