The Impact of News on Financial Markets: Noise or Trigger?

In today’s world, financial news is everywhere. It can be overwhelming to try and make sense of it all. However, not all news is created equal. Some news is overblown and irrelevant, while other news can have a significant impact on stock prices.

Understanding the implications of news is crucial for investors, as it can be a source of investment ideas and help inform investment decisions.

The Overblown Nature of News

News is often overblown by electronic and social media to catch higher eyeballs.

This happens more on days when the news flow is limited. The same news gets repeated and flashed often. However, this really does not change the utility or importance of the news. The less time spent on the news flow, the better for the investing temperament.

The Impact of News on Stock Prices

News, positive or negative, often drives stock prices.

Positive news has a disproportionate impact on stock prices when the markets are tending up and negative news has a pronounced impact when the markets are trending down. In a range-bound market, the news often gets ignored, with little impact on stock prices. Many times, the same news (like large fundraising or announcement of big capex, etc) is treated as positive in a bullish market but negative in a bearish market.

Company-Specific vs Industry-Specific News

News can be company-specific or industry-specific.

Industry-specific news can drive most of the stocks in that industry, while company-specific news can influence only that company’s share prices. Industry-specific news often has a more lasting impact than company-specific news.

News and Different Types of Investors

Traders seek and react to every little bit of news and try to profit from every small movement in stock prices resulting from that news.

Short-term investors build positions in anticipation of the news and unwind them once the news is out or build positions after the news and unwind them once the impact of the news wears out.

Long-term investors normally are the least bothered about most types of news. For them the only developments that can change the long-term course of the company’s fundamentals are relevant, the rest is all noise. Serious and large long-term investors consider negative news as an opportunity to buy/add to their holdings.

News Driving Stock Prices

News Driving Stock Prices

Many times, instead of news driving stock prices, stock prices drive the news flow.

Even if there is nothing new, the sustained uptrend in share prices, generates positive news flow, and the sustained downtrend in share prices, generates negative news flow.

Whatever has already happened in the past resurfaces and appears to be the news!

News as a Source of Investment Ideas

News as a Source of Investment Ideas

News does give interesting ideas for the stock pickers. If investors are smart in focusing on only that news which is new and which throws up interesting long-term trends/patterns.

A positive news item can generate a great investible idea, if it indicates the start of a series of positive developments in the company/industry or gives a glimpse of what is going to unfold in the future.

This way one can get a long highway to invest and hold.

A small window opening gives enough time to the smart ones, compared to the news which opens the door, with everyone jumping in. Initial news matters much more than incremental news on the same topic.

The Importance of Understanding News Implications

Nowadays the bulk of the news is easily and timely available to most of the players and gets analysed at lightning speed. Hence, they get discounted in stock prices very fast. So, they do not give many edges, unless the news receiver is smarter than others in understanding their implications and visualising the underlying and developing pattern.

One should be able to judge whether to buy, hold or sell after the news is largely discounted in the stock price! So a deep understanding of the company and industry matters much more than the news per se.