The news can be interesting and can help you understand what is going on in the markets from a long term perspective but many news articles and headlines take market commentary one step further than it should. The issue is one of assigning causal factors to daily market action.
Recent headlines are an excellent example. Several top stories all ran with a headline that said – “GE Rattles Investors.” The implication is that the GE earnings report (which was inline with expectations) hurt stock returns but is this really true?
[VIDEO] Why Market News Headlines are Meaningless
If that statement were true or reliable then shouldn’t it also have been true for the last several earnings reports as well? In the video I use the example of Fed rate cuts in place of earnings reports, which are often blamed for the market going up and down? Like a series of earnings reports, rate cuts did not reliably predict a negative close in stocks for the last 9 cuts.
In fact, the headlines during each of those last cuts matched their conclusion to the market action. In other words, if the market was down (6 out of the last 9) that day then the headlines implied that the rate cut was the cause. Similarly, if the market was up (3 out of the 9) it was purported to be because of the rate cut. So which is it; do rate cuts make the stock market go up or down on the day they are released?
The answer of course is that because it is unprovable what actually makes stocks rise or fall on a given day financial journalists can say whatever they want. Day to day price action is extremely random so it is a bit like saying that it is snowing today because I did my “snow dance” before going to bed last night. It may not be true, but because it is logically impossible to prove a negative (there is no “counterfactual”) I can still say it without being proved wrong.
Most headline financial stories are interesting but provide little to no actionable information. In fact, trying to take action based on financial headlines, earnings reports or Fed actions could lead to serious losses.
In the video, I will talk about why these headlines exist and how I suggest they should be viewed. I will also talk about one of the most popular morning financial headlines about pre-market futures prices and stocks. Sometimes what is really important is not just knowing what something means but being able to tell when it doesn’t mean anything at all.