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If investors had known in advance the size of the Federal Reserve’s latest interest-rate cut, would they have made big money on stocks and bonds trading on this market-moving intel?
Surprisingly, the answer appears to be a resounding no, at least when it comes to amateur traders and their ilk, according to a recent study from Elm Partners Management’s Victor Haghani and James White.
The researchers placed participants in a dream position of knowing the future in an experiment called “The Crystal Ball Challenge.” Players got an early read of major economic news and Fed policy decisions — without knowing the precise market moves of the day in advance — before placing their bets.
Three groups with varied financial knowledge and trading experience played the game. Wall Street’s seasoned macro traders performed the best. Yet when it came to predicting market directions, the score was far from stellar, with their bets ending up correct only 63 percent of the time. For amateurs, their returns took a hit as levered-up stock wagers went awry.
The results will resonate with many on Wall Street, where monetary and economic trends in the post-pandemic era have bedevilled the smartest minds. This year, the record-setting equity rally is crushing even the most optimistic strategist forecasts while traders have been misfiring on their interest-rate wagers.
The paper, titled “When a Crystal Ball Isn’t Enough to Make You Rich”, suggests that even if one has advanced knowledge of near-term macroeconomic catalysts, translating that into successful investment decisions is a task few could pull off. — Bloomberg.
Bongani Ndlovu
Online Reporter