I've written before about how little we know about the impact of advertising, and one area where the industry really lacks information is the effect of ad spending on boosting stocks.
For instance, I've noticed that when the AT&T spinoff, Lucent Technologies, runs corporate ads explaining what the company does, its stock seems to go up. But when the campaign takes a breather, the stock goes down.
I would think it would be relatively easy to chart the correlation between corporate ad spending and sales volume in a particular stock. Maybe individual companies do this for their own stock, but there are no outside services that measure ad spending vs. stock volume on a regular basis.
Yet it would be easy to do.
In a broader sense, I wonder how much general consumer advertising affects the stock market? When Coca-Cola Co. unleashed that huge barrage of advertising during the Olympics last summer, what impact did the ads have on its stock price?
Or when astute investors see the latest ads from a company whose stock they're following, does whether the ads are effective or off-target influence their opinion of the company's stock? I doubt it, but maybe such considerations should be a factor.
I've often thought that advertising expenditures should be thought of as a leading economic indicator, and in the same way advertising could be considered one of the drivers of the stock market. The question is, of course, which comes first, good times or high ad spending? Do robust sales and profits lead to higher ad volume or does higher ad volume lead to robust sales and profits?
I'll put my money on the latter. In the early '90s, corporate sales and profits were stuck in a rut, at least partly because the major marketers had lost faith in their big brands. In the last several years they've started investing in their brands, realizing the great worldwide strength and equity they produce, and their bottom lines have never been better. Coincidence? I don't think so. Advertising, of course, fueled the revival.
Mutual funds have made the stock market more affordable for millions of small investors-who are also mainstream consumers. Just as consumers buy brand names because they are reliable and familiar, small investors will buy stocks for the same reasons. If I were in the mutual-fund business, I'd start one with stocks of companies that are recognizable consumer brands, such as Coca-Cola, Colgate-Palmolive, Campbell Soup, Federal Express, IBM, Chrysler-and for overseas stocks, Samsung in Korea or Adidas in Germany. To qualify for inclusion, a company would have to invest X percent of sales into advertising. I'd call it the Brand Equity Fund. How can you go wrong buying Samsung in Korea?
How do I know 1997's going to be a great year both for the stock market and business in general? Because ad expenditures are predicted to be up substantially (discounting the Olympics and the election). The trick is to convince corporate management not to cut back ads at the first sign of trouble so that a recession doesn't become a self-fulfilling prophecy.