The news media would have us believe that there is a reason behind every day's stock market move. We as investors have all read newspaper headlines stating, 'stock markets rise 2% on the back of improved earnings' or 'the stock market index sank 3% as market participants were wary of taking fresh positions'. Sounds quite like a self-fulfilling prophecy one way or the other. Probably fulfilling the newsman's need to print tomorrow's newspaper.
Many studies have been conducted to verify the role news flow plays with regard to stock market moves and fluctuations; and varied conclusions in this regard have been drawn.
The daily news is a mix of both good as well as bad news; further subsequent commentary on such news may be good or bad; and further the subsequent inferences and conclusions drawn from such news may be good or bad as well.
For instance, there may be economic events that lead upto an increase in the money supply, reported in the newspaper. This may be interpreted to imply buoyancy in monetary liquidity and a reduced interest cost (due to this over supply of money). This may be concluded to imply that investors would be more willing and inclined to adopt an increased level of risk through the purchase of select stocks in the stock market.
Over a longer period of time (probably extending over a few years), this increased money supply would also increase inflationary pressure on the underlying economy along with a demand supply mismatch. Thereafter, over the subsequent future period of time interest cost would rise probably egged on by regulatory action to control the then present day inflationary conditions. Thereafter, investors may not find stock market investments to be in line with their long term investment and financial objectives.
The stock markets usually respond quickly and efficiently to the news events affecting the economy and its constituents in particular; and discount the price of the affected stocks in the industry or service sector groups accordingly. On occasion, the response of the stock market may be so fast as to obviate investor intention to profit from such news events. The death of a prominent leader, a natural disaster, war and social unrest may be the underlying reasons for this gap down action on the part of the stock market.
While keeping the above in perspective, the news events which would usually have a bearing on stock prices and their future movement and stock market action (whether upward or downward) would be of financial and economic significance. That is news events which are further expected to impact future earnings and growth thereof of the underlying corporate entities the investor may have under study for onward investment. News events which deviate from the expectations of the market participants while being of some importance would impact the stock prices of stocks traded in the stock market in the present. It may also be expected that given efficient stock market mechanisms, the stock price correction or its adjustment or discounting would be equally quick.
It would be observed by most that, bad news tends to follow bad news while good news tends to follow good news. There is also a tendency for stock price change or correction to occur during day 2 through day 5 following the extreme news event, and this reaction is usually opposite in direction to the stock price movement on the first day.
It would be safe to conclude that, investor actions in the stock markets based on news events have not usually been profitable. However, exceptional profits would be available to investors who have correctly interpreted the impact of news events while others get it wrong. Further, profits would not be forthcoming from the stock market by only taking decisions and actions along with the majority of market participants based on news events. Thus, it would be profitable for investors to base their investment decisions and actions based on a correct interpretation of the stock market impact of news events. It would probably be wise to seek out the real reasons underlying the stock market moves, and even take contrarian action if found to be suitable.