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Why bad news often sends stocks higher: Morning Brief

Sam Ro
·Contributor
Updated

Monday, November 11, 2019

Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

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.

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“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)
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

What to watch today

The bond market will be closed Monday in observance of Veteran’s Day, but the stock market is open.

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From Yahoo Finance

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A billboard displaying an advert for Aramco is pictured in the Saudi capital Riyadh on November 10, 2019. - From robots to sniffer drones, Saudi Aramco has ramped up spending on technological innovation while its rivals cut back amid soft oil prices, but the energy giant risks losing its edge after its much-anticipated IPO. Saudi Arabia is offering a sliver of the company, touted as the kingdom's crown jewel, in its upcoming initial public offering that is the bedrock of Crown Prince Mohammed bin Salman's ambitious strategy to overhaul the oil-reliant economy. (Photo by FAYEZ NURELDINE / AFP) / The erroneous mention[s] appearing in the metadata of this photo by FAYEZ NURELDINE has been modified in AFP systems in the following manner: [november] instead of [october]. Please immediately remove the erroneous mention[s] from all your online services and delete it (them) from your servers. If you have been authorized by AFP to distribute it (them) to third parties, please ensure that the same actions are carried out by them. Failure to promptly comply with these instructions will entail liability on your part for any continued or post notification usage. Therefore we thank you very much for all your attention and prompt action. We are sorry for the inconvenience this notification may cause and remain at your disposal for any further information you may require. (Photo by FAYEZ NURELDINE/AFP via Getty Images)
A billboard displaying an advert for Aramco is pictured in the Saudi capital Riyadh on November 10, 2019. (Photo by FAYEZ NURELDINE/AFP via Getty Images)

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