The Google Effect

What can’t Google do? Free email, customised searches, maps, apps, browsers, video—the list goes on. Now researchers claim to have found a link between Google searches and future stock market movements.

The researchers at Warwick Business School say they have developed a method which identifies historical links between searches related to business and politics and subsequent stock market moves.

Using Google Trends data, the researchers compared changes in search volumes around particular topics to subsequent stock market moves.

Overall, they say they found that increases in searches for information about political issues and business tended to be followed by market falls.

“One possible explanation for our results is that increases in searches around these topics may constitute early signs of concern about the state of the economy—either of the investors themselves, or as society as a whole,” the study concludes.

Taking the survey at face value, it would appear that investors could analyse Google search trends to successfully time their entry and exit points from risky assets.

But there are a few points to make about this. First, the authors themselves acknowledge that the strength of the relationship between web searches and market movements has diminished in recent years.

They speculate that this may reflect the increasing incorporation of internet search data into automated trading strategies.

Second, the study covers just eight years and is confined to the US. It arguably would require a much longer dataset and a study of other markets to determine whether these effects are sufficiently persistent and pervasive to trade off.

Third, care needs to be taken in concluding predictive relationships between various external indictors and market movements. The dangers involved in doing so were highlighted in a separate study in 2012 by academic Robert-Novy Marx.

With tongue in cheek, Novy-Marx showed how, using statistical analysis, one could draw credible-sounding links between market performance and factors such as political leadership, the weather, sunspots and even the alignment of the planets.

“The market performs significantly better when Mars and Saturn are opposed,” Professor Novy-Marx said. “Times when… their energies are polarised appear to be particularly propitious times to invest in the market.”

While his mathematics would go over the heads of most laypeople, Novy-Marx’s main point is that just because some statistical relationships appear to match up in regressions does not mean they are a reliable way of predicting the future.

Unlike some of the other apparent effects, the relationship between Google search trends and stock market performance at least has the benefit of sounding sensible.

Ultimately, you can’t just Google up investment success.

 
 
 

Lexington Wealth Management