The magazine cover indicator is supposed to be a contrarian signal, notes Buttonwood on Economist.com. The idea is that once the mainstream press gets round to covering a big story or trend, most of the upswing or downswing has already happened. BusinessWeek is known for proclaiming “the death of equities” close to the bottom of a bear market.
Analysts at Citigroup have applied the test to The Economist’s covers. They selected 44 from between 1998 and 2016 that appeared to make an optimistic or pessimistic point about a market. The results were “a little chastening”: buying the asset on a bearish cover resulted in an 18% return over the following year; selling on a bullish one led to a return of 7.5%.
Yet some calls, such as scepticism about the tech bubble, were right but more than a year early. In some cases the link between the cover and the view of an asset class was a stretch: was a cover against Scottish independence really a bearish view on UK equities, for instance? This is all good fun, concludes Buttonwood, but not something to take too seriously.