Reading the News Like Wall Street
I am frequently asked questions about whether a particular news event will have an outsized stock market reaction. People are surprised that something like Brexit really hasn’t bothered Wall Street very much, but the Fed Chairman changing his wording slightly can cause the Dow to drop 500 points.
So here are 5 ways to think about how Wall Street looks at the news:
- Does the news directly reflect corporate earnings?
In the long run, earnings are all that matter. There may be bad news (like the Brexit fiasco) but that really doesn’t affect US companies too much. Not much of our trade is with Britain. Yes some companies are affected and it could make those stocks move up or down by a fair bit. But on balance, no. - Is this going to be a problem in the future?
When the Trump administration seemed to be serious about a 25% tariff on virtually all Chinese goods, that knocked the stock market for a loop, even though the tariffs were not here yet. - But not too far into the future…
If in 2020 (say) Elizabeth Warren were elected President and both houses of Congress were heavily Democratic, Wall Street wouldn’t like that very much. But that would be a problem for 2021 and beyond. Wall Street followers look out maybe six months. Two years? That is too far away. - Does the news affect the US economy directly?
High wage rates would hit all American companies. If we saw a big spike in wage rates, that would bring the stock market down. But the Government shutdown or lower commodity prices doesn’t have a big overall affect and doesn’t cause a seismic shift in the market. - Interest rates
Interest rates are a huge concern for Wall Street for 2 reasons. If there were 6% bank CDs available, there is a good chance many investors would take some or all of their money out of stocks. High interest rates are a competition for stocks. The other reason is that most companies borrow money. If interest rates rise, their cost of borrowing rises and that hurts profits.
That’s not an exhaustive list. But if gives you some things to think about when you read a news story and wonder if it will affect the markets.