By: Tim Bennett
04.01.2019
04.01.2019
As we enter 2019, Tim Bennett warns investors against second-guessing how the stock market will react to financial news.
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How stock market investors are wrong-footed by financial news.
“The stock market doesn’t know that you own it” is a quote attributed to Adam Smith. I would go further and add that it doesn’t care, either. Unfortunately, many investors behave as though it should and get a shock when indices or individual stocks don’t behave in the way that they expect. Here are a few examples and a suggested solution.
Non-farm payroll numbers
Every first Friday of each month, this key indicator of hiring confidence across big swathes of the US economy, is released to an expectant stock market. There is usually an immediate reaction. However, predicting what it will be is a mug’s game in most months.
That’s because, ahead of the data being released, analysts try to forecast what the number will be. They are looking for evidence that firms are either hiring or cutting back on jobs. Inevitably these forecasts end up being either too optimistic, or pessimistic. Making a call on the stock market reaction is doubly hard, not just thanks of this issue but also because the market may react in either direction.
Why? Well, if the jobs number comes out higher than analysts expect, that is good news in terms of what it says about the strength of US firms. However, if the market then thinks an interest rate hike is more likely (or a series of them) as the Central Bank tries to manage the associated demand, stocks may fall in the short-term. So, you have the seemingly bizarre situation where good news pushes stocks down.
Oil prices
Despite a concerted move away from fossil fuels in some parts of the developed world, oil remains a key commodity for much of the rest. So, the oil piece matters. If demand is rising because firms and consumers are doing well, you might expect a spike in the oil price to boost stocks. However, once again it isn’t that simple. For one thing, the forces that move the oil price are complex (a topic I address in a different video) and secondly, if the stock market sees an oil price spike as a possible indicator of inflationary pressure building, it may react negatively to the news. Once again, investors can be wrong-footed.
Wage data
When firms are feeling confident they tend to hire. If that pressure meets a shortage of labour, then you can get wage pressure. But is that good news or bad news? On the one hand, it puts more money into the pockets of consumers but on the other hand it increases a key cost for firms. By extension, the stock market may react positively or negatively to strong data.
Stock-specific news
This difficulty in making stock predictions extends to the single stock level. Just one example is GM – an announcement at the end of last year of huge job cuts and site closures boosted the stock price in the short-term. Why? Well, grim though the news was, the market took it as evidence that the firm was making a real bid to restore profitability.
How should investors deal with this?
As we head into 2019, remember some key rules that should stop you being side-swiped when markets don’t behave the way you might expect.
Above all, stay cool, calm and collected when investing and don’t be fooled into thinking you can predict the behaviour of either the whole market or any individual stocks. As Ben Carlson at awealthofcommonsense.com puts it;
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