Market Update: Why Do Stocks Rise on Bad News?
A Look On the Bright Side
Trials of Remdesivir, a drug from Gilead, has shown promising results in very ill COVID patience.
https://www.cnn.com/2020/04/16/health/coronavirus-remdesivir-trial/index.htmlAdditionally, a company called Moderma has been awarded up to $483 million to speed up the development of a vaccine for Coronavirus.
If a company is expected to lose money in a quarter and they end up losing less than what was expected, often the stock price will rise. Conversely, if a company is expected to turn a profit of say $10 million in a quarter and when they report earnings they in fact only turn a profit of $8 million, the stock price will often fall.
For all intents and purposes, whether a company has a profit or a loss it does not matter in terms of their short term stock price. What matters is if they made or lost more or less than what they were expected to.
I’ve had friends call me in recent weeks asking “Why in the world is the stock market up. Did you see the unemployment number?”. In case you are not aware, the number of new jobless claims is released each Thursday at 8:30 am EST. The last four weeks have been truly devastating. For context, below is the chart showing initial jobless claims going back to 1967.
Despite these truly disheartening numbers the market surged on each of the last three jobless claim numbers.
On 4/16 the market closed up again despite 5.24 million initial jobless claims.
So why has the market responded positively or at least not horribly to record breaking news of the terrible variety? The reason is simple and that is expectations. The market and the combined wisdom (or lack of) of all the participants expected that jobless claims were going to be worse. When the jobless claims numbers were released and they were not as bad as expected the horrible news was in fact viewed positively by certain market participants.
Along the same lines even though the number of cases of Coronavirus has risen across the U.S over the last three weeks the case count has not been as dire as originally expected. As a result, the S&P 500 has responded positively to the news. It appears that market participants were expecting a worse case scenario for the virus and by extension the economy and as better news emerged the market responded positively.
If the virus data were to take a turn for the worse it would certainly have the opposite effect on markets and we could retest our March 23rd lows. As it currently stands we believe that the market is looking forward and anticipating a reopening of the economy with little risk of reclosing due to the virus making a comeback. If reality plays out as the market expects we likely will not revisit the market lows of March. That being said if we experience a significantly longer shutdown then expected the economic impact will likely be significantly larger than expected and therefore markets will respond negatively. Additionally we and analysts across the country cannot calculate the true economic cost of shutting down the economy therefore it is quite possible that there will be economic news in the coming months that is worse than expected. All of this means that we can expect continued volatility throughout the summer and even into the fall.
I am an optimist by nature. I believe in people and this country. The extraordinary steps we are taking as a country are certainly working and the optimist in me says they will continue to work. I’m sure there will be surprises to the upside and the downside in the coming months which is to be expected. Ultimately we know we cannot predict the future but we do know that we will get through this in time.
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