It is especially important for investors to interpret the news and determine whether it has a material impact on your stocks, explains Alexa Abramovici, Head of Marketing and Sales at Mexem.
Over the last year, it has become increasingly apparent that the news and the news cycle play an important role in affecting the financial markets. With the overwhelming flow of information available to investors, the impact of financial news on market prices is at best uncertain. The media have been identified to play a significant role in shaping the consensus market opinion and evoking this “herdlike” behavior.
Let us look at the pandemic for an example. Early 2020, as Covid-19 was dispersing, most countries decided to impose national lockdowns, forcing businesses to close and stop their activities. Faced with dismal news and ambiguity, investors were quick to panic and markets across the world crashed in March 2020. Subsequently, as governments announced measures to try and reduce the overall impact on the economy, investors became less fearful, and markets went back up.
News and economic data help shape the way we perceive the markets and the value in the markets. Let us look at the different news categories that we use when analysing financial markets:
The categories that we break the news into are as follows:
- Global News Events: These affect the entire market, the entire sector, and the entire industry. Note: Fake news can also have global and local ramifications on markets and stocks.
- Localized News Events: These affect only the individual stock, or the stocks mentioned in the news event. These can be views from our TWS platform under the News panel.
Note: We have seen drastic effects of social memes like those from Wall Street Bets and others on individual stocks such as $GME and $AMC.
News can also be classified as unexpected or recurring:
- Planned or recurring new events
As traders, we prefer to know and list out all of the planned recurring news events that occurs at the same time after a steady period of intervals, for example, a quarterly report, economic statistics release, or the interest rate announcements by the Federal Reserve. These events or variables can be and should be prepared for.
- Reactionary or spontaneous events
Other news events that cannot be planned for are classified as unexpected. The markets react to them therefore we call them reactionary. Examples may be a natural disaster, an economic or financial development, or a terrorist attack. Since these are events for which we cannot prepare, we can only plan our reaction to these news events after they occur.
As professional traders, we need to break down and list all news events that we can plan for and know exactly which ones are global versus local. We can then plan to deal with all reactionary type news events that may spontaneously happen during our trading day.
Do not waste time trying to analyze the specific news; instead, have a planned approach to the type of news and see if it fits into your trading plan.
“Buy the rumourr, sell the news” as is often stated on Wall Street and used to anticipate a shift in the markets. News will have an impact and, ensuring you have a plan in place, will further aid in your ability to successfully understand and trade the markets.
Whilst it is a good idea to always keep up with the news and get the information you need to make your investment decisions; it is also important to put things into perspective and look at the bigger picture. The news is something that happens over the short-term, and although it can be worrying to see bad news unfold, it is crucial to remain focused over the long-term.
After all, people who invested in the FTSE 100 for any 10-year period between 1986 and 2019 have had an 89% chance of making a positive return – and this timeframe did come with a lot of bad news!