Is Good News Bad for Markets?

Posted in: Economics, General, Stock Market, Thought of the Week

This past week has been full of good news: Europe exited its recession, China is doing ok, consumers are borrowing again, and the number of jobless claims dropped to its lowest level in six years. So if the news this past week was so positive, and investors are pleased to see the global economy moving forward, then why did markets sell off? To answer this we must understand the difference between an investor and a trader.

Investors anticipate market movements whereas traders attempt to accurately time the entry/exit for a security. Investors are often looking at the fundamentals of a security and make little effort to time market movements because the risk far outweighs the incremental returns. Traders make their decisions based on other market factors that exist only for a short amount of time and rarely base their decision off of fundamentals.

Let’s revisit the question of why markets sold off so hard this past week. The volatility spike was fueled by traders as they attempt to time the beginning of “tapering” by the Fed – the first step in eliminating Quantitative Easing (QE). The traders are not thinking past QE and are merely attempting to profit from timing short-term market movements. On the other hand, investors realize that the Fed will only end QE when they feel that our economy is strong enough to go on without it. Considering nothing has changed for investors, they see no real reason to sell right now. Read this week’s Thought of the Week to learn more about investors and traders.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.