For newcomers to the stock market, or any financial market for that matter, one of the hardest things to come to terms with is the frequency with which the market reacts to news in a way that seems completely illogical. Sometimes it is just a matter of digging a bit deeper.
An earnings report that shows a bottom line beat, for example, may also contain a revenue miss or lowered guidance. The headline doesn’t always tell the whole story.
Very often though, even that doesn’t explain it and then it comes down to a simple two-word phrase: mood matters.
Yesterday was a good example of that, with stocks finishing generally higher despite bad news.
The breakdown of talks between President Trump and Democratic Congressional leaders can only be viewed that way. I know that some people maintain that a government shutdown is no big deal, but we also heard yesterday why it could be. The ratings agency Fitch warned that if the shutdown continues until March, they would downgrade U.S. government debt.
That would push up the cost of borrowing significantly, a potentially disastrous thing for a nation with a debt of close to $22 trillion and growing.
Yet all the major indices finished higher. The Nasdaq gained over sixty points, and the Dow over 91.
Futures are pointing to a lower opening this morning, but even that looks like a muted move considering what is hitting the wires. Several retail companies, including Macy’s (M) and Kohl’s (KSS), have reported weak holiday season sales, and even Target (TGT), where the news was better, only really met expectations and that stock too is trading lower this morning.
In a more pessimistic environment, that would be seen as a sign that the U.S. economy was heading towards recession, but at the time of writing, index futures are indicating just a drop roughly equal to yesterday’s small gains.
Traders and investors, it seems, are much more focused on further hints contained in the minutes of the latest FOMC meeting, indicating that they will slow down the pace of rate hikes if needed, and a relatively benign end to the latest U.S./China trade talks. No actual agreement was reached at those talks, but a framework was set for further discussions. Both of those things, however, fall into the category of “not bad” rather than good news, and a couple of weeks ago would probably have sparked another monster selloff.
The reaction to news is obviously related to sentiment then, but it is also influenced by the prior positioning of market participants. The massive drop in the runup to Christmas not only priced in any bad news that the world can throw at stocks, it looks to have even overdone it.
With earnings season getting underway next week, something that is usually supportive of stocks, nobody wants to be caught short, or left out of any potential rally.
All of this interesting from a psychological perspective, but it also has real implications for investors. We have returned to a period of resiliency in the stock market. For most of last year, all the potential problems were out there, but were basically ignored as we hit new highs.
The phrase “climbing a wall of worry” became a cliché but climb it did. A market that can ignore bad news will react positively to anything good as well so, while we may see an occasional wobble such as this morning, until the mood changes we can expect to see stocks to march back upward.