Signal vs Noise: What Portfolio Advisors Actually Watch For

Today's market environment is defined by persistent inflation, higher interest rates, geopolitical risk and increased volatility. The abundance of financial information available today could make this overwhelming for investors, especially when the markets feel turbulent. But for those focused on long-term gains, some metrics and indicators can help separate meaningful signals from short-term noise and provide a framework for navigating uncertainty.

Todd Graham, Senior Portfolio Advisor at RBC InvestEase, has managed money through two of the most consequential market events in modern history: the 2008 financial crisis and the March 2020 COVID crash. We spoke with Graham about how his approach to interpreting market signals has evolved and how investors can position themselves to weather downturns.

Q1: What are the top 3 metrics you check every morning?

To gauge market conditions for daily perspective: the VIX; advance/decline or breadth; and bond yields and curve. Bond yields and curve steepness or inversion give indications of inflation fears. Goldman Sachs’ most-shorted stocks index is another metric. Together, these will indicate risk-on/risk-off conditions. Weak markets can be a chance to buy if you're looking to add to positions on weakness or sell if you're looking to trim into strength – you can get paid to provide liquidity to the market. The downside is reversals, and mistaking direction for randomness.

Graham explains that he looks to the VIX as it “measures the market expectation for 30-day forward-looking volatility for the S&P 500".

Q2: How has your approach evolved with recent market volatility?

The market regime has changed especially since Covid and Trump 2.0. The prior market regime was decreasing interest rates and loosening trade restrictions. The new regime has higher geo-political and inflation risks: Ukraine, the Middle East, energy, food, fertilizer, housing affordability and the K-shaped economy.

There is more noise now. The risk is losing sight of one's medium- to long-term goals and risk tolerance, and getting caught up in the heightened amount of noise. For example, negative indicators would have led many investors to decrease risk significantly in March-April 2025 around [Trump’s so-called] "Liberation Day", but this would have been very costly given the sharp and strong recovery since. It is important to distinguish between lagging, co-incident and forward-looking indicators. The most valuable are the latter and they are far more scarce.

Q3: With so much financial data available, how do you distinguish signal from noise?

Markets trade on short-term events, news and tweets. These things do tend to matter to short-term performance and trading, but the more time elapses – or the longer your time horizon – the less relevant they are. There are ways to avoid emotional reactions in trading or investing. Following a rules-based approach, for example.

The following indicators have been very poor in terms of short-term performance but have proven excellent in forecasting medium to long-term returns: the CAPE-Shiller P/E ratio and U.S. Total Market Capitalization to GDP. Ten-year rolling returns are also a good predictor of potential, long-term future returns. At a top, forward returns are likely to be below average and vice-versa.

Q4: What's an underappreciated metric investors might miss?

The bond market is really good at uncovering risk. Often the bond market will sniff out trouble first.

Indicators to highlight are credit default swaps (CDS), spreads and the Senior Loan Officer Opinion Survey – SLOOS. When banks cut back on lending, they're signaling that the economy will slow down. If financial conditions are weakening, corporate earnings will weaken. And if corporate earnings weaken, then the equity markets could be in trouble.

Margin debt is another one. Leverage almost always shows up as a culprit in a major market crisis. There are many historical examples from the crash of 1929 to elevated margin debt in Chinese markets in 2015.

Q5: Can you rely too much on metrics and indicators?

Yes. The best example of this is the 2008 financial crisis. Too many PhDs in a risk management department at an institutional portfolio manager relied far too much on the academic side of using quantitative measures, like VAR or Value At Risk.

During the financial crisis, people would look at their risk reading and say, 'our risk is okay, we're safe, right?' And then, all of a sudden, the financial crisis comes along, and the banks are failing, and there wasn't nearly as much protection there as they thought. It gave them a false sense of security.

VAR assumes a normal distribution, so when you go through periods like the financial crisis in 2008 and 2009, VAR tends to fail – because markets move too much, too fast compared to historical data. When you need it most, from a risk management perspective, it fails. It breaks down.

Q6: What's the scariest market moment you've experienced and what did you learn?

It's hard to say whether it was the 2008 financial crisis or March 2020, COVID. Both of them were really, really fast and really, really systemically dangerous.

We have a fiduciary duty to make sure we're going out to the client with things that prioritize managing risk in their accounts.

Whatever people think their risk tolerance is during normal times is not a fair representation of what their actual risk tolerance is, until they go through an event like that.

Q7: How can investors survive downturns?

If you go in carrying way too much risk, if you have margin and you're concentrated, there's not much you can do except dial risk down. And then the problem is, once [a downturn] happens, you likely won’t have the capital or the resources to be invested for the recovery.
The people who can still have capital and resources to stay invested might be able to take advantage of recovery – the market almost always bounces back. The S&P was down 37 per cent for the calendar year in 2008 and was down 57 per cent from peak to trough. But the next year, there was recovery. Historically, it's almost always been like that.

Q8: When you're reading market news or social media commentary, what's a red flag?

There have been so many more people holding themselves out as experts in social media posts. This is exactly what happened with the meme stocks on Reddit. People are going on there and are orchestrating short squeezes. They’re often trying to manipulate the stock prices. The fundamentals become irrelevant. They're just trying to pump stock prices up so they can profit – and then dump them.

These things are not new. They had pump and dump schemes all the way back in the roaring '20s, and before the stock market crash in 1929. These pools of people getting together, driving things up, and manipulating stock prices apart from their fundamentals. This has been going on forever. The only thing that's new is the technology – like social media and AI. Everything's faster, and there's more technology involved.