12/27/2023

How news affects the market: the overview

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News plays an exceptional role in the investment world. In fact, it is one of the most important factors that can influence an investment decision. It can profoundly impact investor sentiment towards specific investment vehicles, companies, or entire industries.

Since news has the power to alter your investment goals, it stands to reason that other traders are equally susceptible to its sway, collectively affecting the broader market sentiment. Therefore, ParadTrade decided to talk in detail about how exactly the news affects traders’ sentiments.

Good news and bad news

ParadTrade reviews the dynamics of Wall Street, the Forex market, and fluctuations in commodity prices every day. You may have noticed how rapidly traders respond to even the slightest whispers and intently observe geopolitics and decisions made by government agencies. Additionally, you may have discerned a consistent pattern in market behavior.

Negative news typically triggers stock sales. Poor earnings announcements, corporate governance failures, widespread economic and political uncertainty, and unfortunate events all contribute to selling pressure and lower prices for a majority of stocks, if not all.

Positive news, on the contrary, stimulates stock purchases. Encouraging earnings reports, novel product announcements, corporate acquisitions, and favorable economic indicators all generate buying pressure, propelling stock prices upwards.

Cases of market reaction to news

ParadTrade provides several illustrative examples:

  • The announcement of new Blackpink music in July 2022 boosted YG Entertainment’s stock price by 10%, reflecting investor excitement about the group’s return.
  • Netflix’s loss of 200,000 subscribers following the easing of lockdown restrictions triggered a 37% decline in its share price, indicating investor concern about the company’s growth prospects.
  • The 2020 replacement of Bob Iger with Bob Chapek as Disney CEO was accompanied by a significant drop in the company’s stock price, falling by 44% in 2022, reflecting investor uncertainty about the new CEO’s leadership.

 

When bad news becomes good ones

The same piece of news can have both positive and negative consequences, depending on the industry or company involved. For instance, a hurricane hitting the coast will negatively impact insurance companies as they face increased claims. However, home improvement retailers may benefit from this news as people repair their damaged homes, leading to higher sales.

Or here’s another case: ParadTrade recently reviewed news about a possible rise in coffee prices due to a new EU law. On the one hand, this is bad news for coffee-producing countries, the leaders of which include Ethiopia, since the likelihood of rising prices is provoked by the lack of infrastructure for local producers to comply with the law. In addition, this may cause dissatisfaction among European consumers. However, for traders who have already bought coffee futures, this is a good time to make money by selling.

 

The impact of news can be mixed

While news often influences investor behavior, its impact is not always straightforward. Even positive news, such as increased earnings, may not always lead to stock price increases.

For instance, if a company reports earnings growth that exceeds analyst expectations but falls below the industry average, investors may still sell their shares, indicating that the growth is not as impressive as initially perceived. Conversely, if a company reports a smaller-than-expected loss, this could be interpreted as a sign that the company is performing better than anticipated, leading to a boost in stock prices.

Additionally, stock prices can deviate from their intrinsic value, either overvaluing or undervaluing a company. Savvy traders can capitalize on this phenomenon by buying undervalued stocks, anticipating a rise in their true value. As the company’s performance improves, stock prices will reflect this reality, allowing traders to reap profits.

On the other hand, investors may sometimes overestimate a company’s worth based on news reports. This was evident during the dot-com bubble of the 1990s, when investors blindly followed website traffic as a measure of a company’s success. The ensuing market crash in 2000 was a stark reminder of the potential pitfalls of basing investment decisions solely on news reports. This event was predicted by Warren Buffett, whose strategy ParadTrade already told in more detail on the blog.

How news affects Wall Street

Let’s say you see the following news on the ParadTrade website: Apple reporting a significant increase in quarterly profit compared to last year can be seen as good news. However, it would have been even better if the increase was as high as Wall Street was expecting. If the increase is lower than expectations, the stock price might fall. This is because investors might be disappointed with the results and believe that the company is not performing as well as it could be.

On the other hand, if investors believe that the stock price has fallen too low, they might start to buy shares in anticipation of better sales in the current quarter. This could cause the stock price to rise. However, if a new report comes out that predicts a slowdown in sales across the entire tech sector, the stock price might fall again.

This is why so-called conservative investors often prefer the buy and hold strategy. They buy shares in companies that they believe have a good long-term future and they hold on to those shares even if the stock price goes down in the short term.

 

How should an investor react to bad news?

Market swings are a common occurrence in the world of investments, and negative news often triggers widespread turbulence. However, it’s crucial to bear in mind that these news-driven stock movements are typically fleeting.

First of all, ParadTrade recommends diversifying your portfolio. A diversified investment portfolio is crucial for navigating the ups and downs of the stock market. By spreading your investments across a variety of companies and industries, you can minimize the impact of negative news on any single holding.

WANTS TO KNOW HOW TO MAKE EARNING FROM NEWS?

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