Stock prices tick up and down constantly due to fluctuations in supply and demand. If more people want to buy a stock, its market price will increase. If more people are trying to sell a stock, its price will fall. The relationship between supply and demand is highly sensitive to the news of the moment.
Nonetheless, chasing the news is not a good stock-picking strategy for the individual investor. In most cases, professional traders react in anticipation of an event, not when the event is reported.
How News Affects Wall Street
Say Microsoft reports a hefty year-over-year increase in its quarterly earnings. That's good news.
Except that Wall Street may have been expecting an even heftier increase. The stock price may fall.
- Government economic reports are always news, as they suggest the strength or weakness of the economy, the consumer, and key industry sectors.
- Quarterly financial reports indicate how a company did in recent months and may contain clues for the near future.
- Global events can wreak unexpected havoc.
A day later, traders may decide that Microsoft's price has fallen lower than its fair price. They will buy it, driving the share price up, in anticipation of even better sales to come in the current quarter.
Hours later, a new report may predict slowing sales in the overall tech sector. Microsoft stock may fall, along with every other tech company out there.
This is one reason why so-called conservative stock pickers prefer a buy-and-hold strategy. They can ignore the hour-to-hour noise, confident that a good company's stock will, over the long run, go up.
Good News/Bad News
Negative news will normally cause people to sell stocks. A bad earnings report, a lapse in corporate governance, big-picture economic and political uncertainty, and unfortunate occurrences all translate to selling pressure and a decrease in the prices of many if not most stocks.
Wall Street traders don't try to follow the news. They try to anticipate it.
Positive news will normally cause individuals to buy stocks. Good earnings reports, an announcement of a new product, a corporate acquisition, and positive economic indicators all translate into buying pressure and an increase in stock prices.
When Bad News Is Good News
Bad news for some stocks is good news for others.
For example, news that a hurricane has made landfall may cause a decline in utility stocks, in anticipation of costly emergency responses and repairs. Depending on the severity of the storm, insurance stocks will take a hit on the news.
Meanwhile, the stocks of home improvement retailers will rise in anticipation of higher sales over the months to come.
Anticipating the News
As noted, professional traders spend much of their time trying to anticipate the next news cycle, so that they can buy or sell stocks before the real numbers are released. They use a number of sources of information in this effort:
- Government economic reports. The employment report from the Bureau of Labor Statistics is an indicator of the strength of the economy and the consumer. The U.S. Census Bureau report on durable goods orders suggests how confident retailers are of the strength of spending in the months ahead. They are among many government reports that are used as lagging indicators and leading indicators. Leading indicators, like those durable goods orders, are more highly prized.
- Company and industry news. Quarterly reports are, literally, old news. Traders want to know how orders are shaping up right now, what products are getting hot, and which trends are dying.
- Gossip. Business news reports often note that a company's revenues or sales met or failed to meet a "whisper number." This is exactly what it sounds like. In the absence of hard facts, Wall Street professionals swap gossip, some of it based on solid information and some not.
There are events that simply cannot be anticipated, like a massive auto safety recall, a Mideast crisis that drives up oil prices, or a prolonged drought that devastates crops.
Traders may think they're pricing in risks, but the possibilities for things going wrong are limitless.
Thus, it's unexpected news – not just any old news – that drives prices in one direction or the other.