Reality Versus the Expectations of Reality

A frequent question the author gets from casual investors is why the stock market rose (fell) when the economic news of the day is bad (good). They often assume that bad economic news should result in an immediate negative movement in stock prices, and vice versa. There are a lot of reasons this rel...

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Bibliographic Details
Published in:Journal of Financial Planning 2012-05, Vol.25 (5), p.28
Main Author: Riepe, Mark W
Format: Article
Language:English
Subjects:
Securities markets
Valuation
Online Access:Get full text
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Summary:A frequent question the author gets from casual investors is why the stock market rose (fell) when the economic news of the day is bad (good). They often assume that bad economic news should result in an immediate negative movement in stock prices, and vice versa. There are a lot of reasons this relationship isn't nearly as tight as investors suppose. His impression is that the financial media do a good job of positioning new economic news relative to what numbers were expected, but the mainstream media, which devote a few minutes in a given broadcast to financial markets, rarely go to this trouble. The lesson for your clients: stock market reactions to the daily flow of news are not so much about the news itself -- good or bad. They are about whether that news was expected, leading to a reaffirmation of existing market valuations, or a surprise, leading to a reassessment of current valuations.
ISSN:1040-3981