Why bad news often sends stocks higher: Morning Brief

Sam Ro
Managing Editor

Monday, November 11, 2019

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The news just has to be better than feared

In the stock market, expectations matter. At any given moment, the stock market will reflect a certain set of expectations. And so, what moves markets are changes in those expectations.

In other words, news doesn’t have to be good or bad on an absolute basis to move markets. It just has to be relatively better or worse than what was expected.

Based on this logic, you can have bad news crossing the wires. But as long as investors and traders were expecting worse, you should in turn expect prices to go higher. And that’s what appears to be happening in the market now.

“Better-than-feared 3Q earnings results have helped drive the S&P 500 (^GSPC) to an all-time high of 3093, just 0.2% below our year-end 2019 target of 3100,” Goldman Sachs’ David Kostin said in a note to clients on Friday. “With 89% of companies having reported, 52% have beaten consensus estimates by more than 1 standard deviation of analyst estimates, well above the long-term average of 47%.”

Glass half-empty: it's bad news. Glass half-full: the bad news was expected to be worse. And that's good news in the stock market. (Getty)

There’s no shortage of negative forces out there that are preventing companies from delivering better results. You have an unresolved trade war between the world’s two largest economies that has businesses delaying investment. You have labor costs rising as productivity deteriorates. And you’ve got a U.S. president going through an impeachment process that, among other things, has the potential impact policy matters in the pipeline that could directly impact an array of decisions made by consumers and businesses.

But as we’re learning, it appears that reality isn’t as bad as what’s been feared.

“The combination of extremely low expectations and better than expected results has been reflected in stock performance,” Kostin said.

By Sam Ro, managing editor. Follow him at @SamRo

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