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The Financial Headlines: A Caution against Causation

By Philip Bachman
caution
Keeping up with financial news takes valuable time. Scanning the headlines in the financial press can be a good way to catch a quick glimpse of the day’s news. Beware, however, of headlines’ often broadly-painted explanations of market movements.

By definition, headlines are summaries of a larger news story. Therein lies the value of headlines. But because of their requirement to be brief, financial headlines and stories sometimes oversimplify a market development. The little word “as” is perhaps the biggest culprit. Words like “as” in headlines imply a cause and effect. This is not necessarily wrong, but it can lead us to believe an oversimplified reason something happened.

For example, a headline reads “U.S. stocks climb as oil prices swing sharply higher.” It is true that in recent months U.S. stocks have traded in line with oil more than the historical norm, so this information is not false. However, there are multiple other reasons that U.S. stocks might be gaining ground the day this headline was written. Oil may be one reason but not the only reason.

This notion is a question of correlation and causation, which are not necessarily the same. With an “as” headline or other cause-and-effect headline, one might be better suited to read both statements independently. For example, “U.S. stocks climb.” “Oil prices swing sharply higher.” Reading it that way is equally informative, and it helps us not oversimplify causation in our minds.

Generalizations can be useful sometimes in understanding the markets, but remember that markets are multi-faceted at their core.

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