How is the Stock Market Impacted by the News Cycle?

How is the Stock Market Impacted by the News Cycle?

The stock market is where investors buy and sell shares of publicly traded companies. Companies list their shares on one of the exchanges, such as the New York Stock Exchange or the NASDAQ, and investors place buy or sell orders for the shares through a brokerage.

Market demand determines the share price of a stock.  If investors place orders to buy more shares than to sell shares, then the share price will increase. Conversely, if the demand to sell shares is larger than the demand to buy shares then the share price will decrease.

While investor demand for a company’s stock is influenced by many factors, the news cycle has one of the largest impacts. News items that can impact a stock’s price fall into two general categories: company-specific news and broad economic and political news.

Company-Specific News

Company-specific news refers to any news that relates to the company itself. One of the most impactful company-specific news sources is the release of the quarterly earnings report. If various metrics such as earnings per share, sales, and net margins beat the investor expectations, then the share price may rise. Of course, the opposite holds true too. If a company misses the expected earnings, then demand for its shares may decline. This can lead to a decline in the share price.

Wall Street analysts’ opinions are also newsworthy. These analysts give their clients buy and sell recommendations on stocks. A newly issued positive rating can lead to an increase in demand for the shares, causing the stock price to rise. A negative rating can lead to a price decline.

There are several other company-specific news items that can impact a stock’s performance. A new product announcement may lead to a buying frenzy in the shares if investors are excited about the new product. A change in company leadership, such as a new CEO, can alter investors’ excitement for the prospects for the company and its stock. Finally, a change in the dividend policy, or the amount the company pays out to its shareholders, can also impact the stock’s price.

Economic and Political News

Broad economic and political news also impacts the stock market performance. Economic data is continuously released, and this data can have a strong sway on stock prices. For instance, if the government releases gross domestic product or employment data that disappoint investors, then the stock market may decline.

Political news such as threats of war, trade pacts, and tariffs affect the future of the broad economy. Elections impact investors’ view of the future of a country and its economy. The stock market will react to these types of economic and geopolitical events.

Invest for the Long Term Regardless of the News Cycle

It is very easy to instinctively react to the news cycle. In many cases, this can have a detrimental impact on your overall returns. It is important to have a plan and stick to it. It is next to impossible to pick market tops and bottoms. Dollar-cost averaging, or investing a certain amount every week, month, or year, ensures that you buy stocks at all market levels rather than reacting irrationally to the news cycle.

While it is prudent to stay invested for the long term, there are some things that you can do to minimize your risk. Diversification is an investor’s best friend. You should diversify among asset classes, such as stocks, bonds, cash, and commodities like gold. Diversification in asset classes is important, too. For example, your stock holdings should include stocks from different parts of the world, different market capitalizations, and both growth and value names.

Also, consider your risk tolerance and stage in life. If you lose sleep worrying about your investments or you are approaching retirement, it is prudent to reduce your exposure to risky assets such as stocks. Investing a portion of your assets in fixed income securities and cash will decrease your risk.

How Can You Do This?

Investing is just as much psychology as it is finance. The news cycle can have a huge impact on investors’ psychology. Having a plan in place and sticking to that plan will remove the impulse to act irrationally when news items cause a ripple in the stock market. With SmartWealth, we take the time to help you put together a plan that suits your risk tolerance, with the goal of guiding you on your investment journey for the long term.

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