Markets have a funny way of interpreting the headlines, economic numbers, and surprises. As investors rush to conclusion, voting by buying or selling securities, when all is said and done, we are reminded that the news doesn’t drive markets. News drives market noise. Depending on the emotional state of the markets, sometimes news events can cause the noise to be louder, and other times the noise is almost muted.
Take for instance the global news headlines that we have seen in 2024. Global tensions are heating up. College campuses are seeing protests, the occupation of buildings, and borderline riots. On top of that, the US has what is sure to be a contentious election coming up in November. These events, among others, have yet to have as big of an impact on the markets as one would expect.
That is not to say that we have not seen volatility begin to increase. It has. Large technology stocks started reporting first quarter earnings a few weeks ago. Markets have been a bit more emotional since the beginning of April. However significant, or insignificant, last week’s market headlines created a little louder noise.
Is Good News Bad News?
The big news headlines came last week. Ever since the pandemic in 2020, markets have seemed to pay attention to what the Fed has to say. Whenever Chairman Powell speaks, markets have listened closely, whether or not anything meaningful was concluded. In November, markets rallied into the new year on the speculation that the Fed would begin to cut rates as early as March. As March came went, the Fed held interest rates steady.
During the press conference that occurred on Wednesday of last week, “as expected,” the Fed chose to hold interest rates at 23-year highs. When the announcement occurred at 2pm eastern, the S&P 500 was down on the day. As the Fed announced that it will likely take “longer than previously expected” to combat stubborn inflation, but did not expect future rate hikes, markets rose.
The S&P 500 index climbed more than 1% on the “good news.” But maybe the good news was actually bad news? Or was the news actually not news? After climbing, markets tumbled into the close, with the S&P 500 finishing on its low point, down -0.34%, a swing of about -1.60%.
Is Bad News Good News?
So, if perceived good news (like no more rate hikes) might actually be bad news or no news, can bad news also be good news?
On Friday, markets had a look at the jobs report. As an AP News article titled “Wall Street surges as key report shows pullback in hiring” reported:
“The nation’s employers added 175,000 jobs last month, down sharply from the blockbuster increase of 315,000 in March. It was also well below the 233,000 gain that economists had predicted. April’s average hourly earnings also rose less than expected. The report suggests that the Federal Reserve’s aggressive streak of rate hikes may finally be cooling the pace of hiring.”
That doesn’t sound like a positive, but the article goes on to quote the chief economist of LPL Financial, Jeffrey Roach, who stated “The demand for labor is slowing, which will eventually ease inflation pressures, giving the Fed some leeway to cut rates later this year.”
So, while slowing jobs growth might sound like bad news, maybe it’s actually good news? Following the report, markets rose above 1% on the day.
Stock News can Create Noise
Stocks, especially Magnificent 7 stocks, which have a greater impact on market fluctuations, can create their own market noise.
Two weeks ago, investors saw Meta stock plummet, despite what many viewed as a positive earnings report. The speculative reason for the decline was that while earnings were positive, management called for an uptick in spending this year. The stock’s news dragged the rest of the market down with it. All was forgiven the following day, when Google reported earnings and saw its share price soar and drag markets along for the ride.
Last Thursday, Apple reported earnings after the day’s close. On Friday, Apple saw its share price up more than 6% on the day, causing the technology sector to lead all others in daily performance. What was the reason? Well, Apple earnings fell compared to last year, but fell less than what was feared, so that created positive noise.
News Drives Market Noise
News does not drive markets. News drives market noise. The impact of that noise has to do with what state or environment the market is currently navigating. During bull markets, news might cause a single day’s fluctuations, but have no meaningful impact on the overall trend. During bear markets, the noise can be very loud and cause a wave of volatility.
Either way, do not get hung up in the day-to-day headlines, nor try to speculate what the headlines mean for the future of the markets. Most of the time, markets will do the opposite of what is expected, or do what is expected but for unexpected reasons. Look at the world right now and compare it to the markets. There often feels like there is a disconnect. Don’t make decisions based on what should happen. Decisions should be made based on the reality of what is happening.
That is why, at Canterbury, we do not focus on the intricacies of the news headlines, nor do we try to make predictions for what the markets will do next. We practice Adaptive Portfolio Management. Adaptive Portfolio Management is about building and maintaining an efficient portfolio based on today’s market environment, not a hypothetical environment six months from now.
As market conditions rotate, an adaptive portfolio will adapt and adjust its holdings and allocations to maintain consistent volatility and risk levels. The objective is to move in concert with the changing markets. It’s like having a thermostat in your home. The thermostat does not predict what next week’s temperature will be and then adjust right now to accommodate those future (and uncertain) conditions. The thermostat adapts by making adjustments based on the reality of what the current conditions dictate.
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