The News and The Market, Part 2 (of 2)

By Brad Thomason, CPA
 
 
In last week’s blog I addressed the fact that simplistic headlines can create misunderstandings about how market behavior plays out.  Though short and direct statements are necessary for a headline to be workable, such statements can imply a direct cause and effect relationship which is simply not there.
 
Today I’ll mention two other topics about investment news that are worth keeping in mind.
 
The first is a discussion of what often happens when a particular company gets an above-average amount of news coverage for something bad.  In these cases, it is not unusual to see the company’s stock price fall.  Often, in fact, it falls far further than one would rationally predict if comparing the probable cost of the bad item to the degree of loss in market capitalization.
 
These events happen all the time, but one from the year just passed that you may remember was the scandal with Papa John’s, after its founder made some less-than-well-received-remarks last summer.  Social media blew up, the story was everywhere, and over the course of a month the shares lost 30% of their value.  Then the news cycle moved on.  People kept eating pizza (‘cause, you know, it’s pizza…) and within a few more months all of the old decline had been recovered.  A sharp watcher had a chance to pick up a nice gain for a hold time of well less than a year (remember that the recovery of a 30% loss equates to more than a 40% gain for someone who buys at the bottom of the dip).
 
News hits of this type often cause changes in market prices which far exceed economic reality, and when that happens, the end of the news event usually sets the stage for the economics to take over again.
 
The second news-related topic we’ll address today really isn’t so much about news, but rather about the absence of news.  For everything that you see in the popular press about financial topics, there’s far more that never gets into the general reporting – and much of what’s left out is way more interesting than what actually gets talked about.
 
Most people in the US know that the Dow fell in December. Most people don’t know that the metal palladium is up over 50% since late summer.  Nor that investing in palladium was just as easy as investing in the Dow, requiring nothing more than a plain old stock brokerage account.  But was that price climb chronicled on the evening news? 
 
In fact, closer to home, your friendly neighborhood Target store saw its shares surge by an even bigger percentage than that from the summer of 2017 to this past summer.
 
Trust me when I tell you these things are not rare:  If pressed for more examples, I could go on longer than you would keep reading.
 
Everyday there are far more stories about investment-related topics than ever make their way into the mainstream news.  Sometimes looking at specialty news outlets is the key.  Sometimes spending your time digging around in random price charts will help you uncover these not-hidden-but-not-publicized developments.  And the reality is that even with those steps there would still be a lot you missed.  There aren’t enough hours in the day to find out about everything that happens.  But back to the basic point: be aware that the fraction you get from regular news is tiny, indeed. 
 
So to sum up the last two posts, on the matter of news:
 
1. News headlines have to be simple, but in being simple are usually misleading when they suggest causality.
2.A lot of news attention about a negative event can cause shares to lose an amount of value that is all out of proportion to the economics of the actual event; and in such cases prices often quickly recover when the news goes away.
3.For all the financial news that gets put out, it only covers a small fraction of the stories; and often misses many of the more interesting ones.
 
Well, that’s it for today, folks.  Happy new consumption.