The question becomes, when is "good news" good for investments and when is "good news" bad for investments? To help lay the groundwork for this phenomenon you should first look to the investment markets in general as well as to the economy. The investment markets are comprised of several different major segments of investors; each can and do impact the direction of the markets. Private investors account for one of the large segments; and when the segment moves more or less as a block, they can impact the direction of the markets, as can each of the following segments. Institutional traders make up another group and can actually be divided into several subsets such as those trading for private pensions and corporations. Another subset would be the traders for public funds such as mutual funds. A third could be traders for foreign investors. Understanding what may be important to each of these groups can shed light on how they may move in reaction to the release of certain information.
Private investors are generally more worried about the here and now rather than the future. The market declines earlier this year created substantial withdrawals from equity investments, thus the private investors were pulling out of the stock markets as a group. Many of the institutional traders were taking the opportunity during this pullback to pick up investments they wanted to hold for the long-term, therefore many were buyers.
Getting back to "good news vs. bad news," the impact of each will generally depend upon the current stage of the economy. Presently, our economy has been expanding for a number of years. This has been shown with the additions of jobs and the growth rate of corporate profits. Since we are now in the later years of the expansion, many of the prior excesses have been used and competition for goods as well as employees can heat up. This is the time when the Federal Reserve monitors the economy very closely, since their most important task is to keep inflation from expanding beyond the Feds preset range.
When demand outstrips supply, the only direction prices can go is up. Most would say our economy is currently in this stage. The Federal Reserve is not raising interest rates but is concerned about inflation. By raising interest rates, their hopes would be to slow the economy and demand on supplies hence slowing down price increases.
Good news about the economy presently may mean there is an increased risk in the Federal Reserve having to raise interest rates to combat inflation; and if they do, this will add costs to businesses and may cause corporate profits to slow as well. The markets reaction in this case most likely would be to fall on the good news, because an interest rate increase would be bad for business.
In the event the jobless claims report comes out with more individuals filing for first time claims, this would generally be considered bad news for the economy. Due to the present position of our economy, this bad news may actually be welcomed by the investment markets; since it could indicate to the Federal Reserve they can continue to delay from increasing interest rates.
I have described two different news releases and how they may presently impact the markets, Had similar news releases taken place during 2002, the exact opposite market reaction may have occurred; because the economy at that time was not growing and may have been in a mild recession. This varying reaction to what most would say is the same news is part of the cause for the difficulty and complexity in managing investments.
While we may all be better armchair quarterbacks and certainly better than those fool hearty coaches with their inept decisions, to apply similar part-time strategies and limited knowledge to something as valuable as your future may not be the best choice. Professional advice on the management of your investments, insurance, or estate planning is not about the cost, but should be about the value added by the professional. A recent prospect responded to me saying our management fee was too costly. What is too costly certainly varies and to some any cost is too high. However, I responded saying, "While costs are important, it is not the absolute determining factor." I reminded the prospect it was the net return after costs that was important; and if a professional could deliver a higher return or the same return with less risks after all costs, does cost really matter?" If you need assistance with your investments, you should seek a qualified professional.
HOW TO REACH THE WRITER
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 21 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member NASD, IPC.