Dear Bernard,

Are you familiar with cause and effect?

While I'm positive you've heard the phrase, I feel in the financial industry we are always trying to look for causes and anticipate solutions, maybe even where none exist. What comes to mind is the butterfly effect.

If you don't know, the butterfly effect states that if a butterfly flaps its wings in a certain way or at a certain time, it can set off a chain of events that leads to a hurricane half way around the world.

In the financial world, those always searching for these types of correlations can be called technical analysts. There is even a professional designation called CFA, which stands for Certified Financial Analyst.

Don't get me wrong, you want and need CFAs. As far as I know, all investment companies and investment funds have multitudes of CFAs on staff. In our office, Chad calls me a closet CFA (I do not have the designation but sometimes get lost in the weeds as I review and monitor investments).

Some of these correlations are common sense. If there is a refinery shut down in our area, gasoline prices will rise. If a store has too much inventory on hand, you can expect a sale. If you spend hours in the sun without sunscreen, you can expect a sunburn.

Other correlations have become nonsensical. For example, in the NHL, players do not shave until they win the Stanley cup or are eliminated from playoffs. I'm sure you have heard of things like wearing your lucky socks when your team has an important game.

The financial industry is not immune to such lore. Maybe you have heard the phrase "sell in May and go away (the belief that the stock market performed poorly from May to October). Perhaps you've heard others like the market will perform better or worse depending on which party wins the election (we have some great charts to share on that if you are interested).

The bottom line is that while there truly are certain effects based on certain causes (if I touch a hot stove, I will burn myself), many times the correlation between 2 unrelated items are just happenstance.

Below I placed a link to a site called Spurious Correlations. It has some humorous items that have no reason to go together but yet have followed the same trend. If you have a few moment check it out. I hope you are amused.

Spurious Correlations



As always, thanks for reading.

Bernie & Chad