The Paradox of Market Moves and the News

By ,   August 1, 2014

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In the investment world, global markets are absorbing and digesting new information daily.  From economic news to company earnings to geopolitical turmoil, investors must interpret this information and make portfolio management decisions.  However, the market does not always move in an intuitive way where “good” news should cause the market to go up, and “bad” news should cause the market to go down.  There are times when the opposite occurs – good news is bad for the market, and bad news is good for the market.  

This dichotomy was illustrated most recently with the release of the July employment numbers.  Ahead of the news announcement, markets were set to open sharply lower.  The previous day brought a decided sell-off in the U.S. markets as investors seemed to be positioning for the Fed to raise interest rates earlier than expected on the back of stronger economic data.  

The jobs numbers missed expectations and were lower than forecasted.  Further, the unemployment rate increased slightly.  On the surface, this news appears “bad” because less jobs were created and more people were out of work.  Yet, the market rallied on the news and prices started moving up.  So bad news was good for the market?

The answer lies within the broader context of our economic situation.  The employment news announcement provided new information to expectations that were already being priced in.  Remember the day before the news, markets sold off most likely because Fed policy may be changed in response to stronger data.  With new weaker data in the jobs market, there becomes renewed support for further Fed accommodation which is positive for the overall market.  

So it is very important to consider the context of a specific news event and how it relates to the current sentiment and expectations of investors.