Do share markets care about news headlines?
In April, the US share market posted its best month in over 30 years. How can this be?
In the five weeks from 20 February through 19 March, 1.1 million US citizens filed jobless claims. During this time, the US share market fell 29%. In the following five weeks, there were over 25 million jobless claims and the market rallied 28%.
What is remarkable about this, is not just that the market rallied, it’s how it rallied. On the day that the first big jobless claim number was announced, the S&P 500 gained 6%!
Following the release of the next jobless claim data, the S&P 500 gained 2.3%.
May 1 saw the announcement of the worst GDP number since the Great Financial Crisis. How did the share market react? It climbed 2.7% higher.
We look at the headlines and we look at the screen and we scratch our heads in disbelief. “This doesn’t make any sense,” we say.
We know that financial markets are forward looking, but it’s in our nature to connect the news of the day with the price on the screen. This is the disconnect – we’re looking at today, the market is looking into the future. That doesn’t mean it always gets it right, but that’s why it feels like it always gets it wrong.
Company prices aren’t rallying because of terrible numbers. They fell in anticipation of them. For the last few months, they have been rising in anticipation of the recovery.
In the eye of the storm, when all the news is terrible, it’s common for investors to wonder what the catalyst will be for the selling to end. This is the wrong question to ask. The market doesn’t need a catalyst, it’s not a chemical. Sometimes the reason the market stops falling is because nobody ever sees it ending. Like Harvey Dent said, “The night is darkest just before the dawn.”
Nobody wants to read a headline “Stocks rise as things are terrible but not catastrophic,” but this is usually closer to the truth than any other explanation. This is hardly a satisfying story, but the market is not there to support the headlines. It’s there to reflect all known information.
I realise that the market is forward looking, but gosh, these past few months are some of the most confusing I have witnessed (and I don’t think the current turmoil is over yet).
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online
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