Tuesday, August 27, 2013

How Media Affects the Stock Market

CNBC's "Breaking News mode" (Note: T...
Media is really important - it highly affects how its listeners feel and think. Regarding the stock market, there are a couple of major media outlets that dominate the financial news world - CNBC, Barrons, and the Wall Street Journal. The media cannot move the market any way it wants. Rather, it acts like a follower - meaning that it puts out headlines that can hopefully "explain" the stock market's recent price action.

The News Doesn't Push The Market - The Market Makes the News

This is a huge misconception that many people have, thanks to CNBC and all the other media outlets. Whenever the market falls or rises, CNBC will attribute that market movement to a piece of news. 

For example, CNBC might say "The Dow falls 100 points thanks to the Fed's Minutes". The trouble is, a lot of investors actually believe that the news event caused the market to fall! That is 100% wrong! Why? Because the news doesn't push the market. What happens is that the market moves in one direction, and then the news reporters at the media outlets scramble to find an excuse that they hope can explain the market's movement. 

In other words, the news doesn't really drive the market. Reporters just make up an excuse for the market's movement because they have to. They can't tell their readers "I don't know why the market went up". They'd lose their job! 

On any random day there will ALWAYS be both bullish and bearish pieces of news. What the media outlets choose to focus on (make as headlines) depends on how the market moves. If the market goes up, bullish headlines will dominate. If the market falls or the market has peaked, bearish headlines will dominate. That's also why in a bull market, investors will ignore any bad news. Similarly, in a bear market the investor will ignore any positive news (because people are so stuck in their bullish/bearish mentality that they become blindsided). 

The News is Just an Excuse

The stock market is just a bears vs. bulls game. The big players in this game choose a side, and they want their side to win (obviously). Historically speaking, whenever one nation wanted to invade another they always needed an excuse. It would be bad PR to just invade another country for no reason. That's why when Japan invaded China in 1931, they used the excuse that China had killed a Japanese official to start the war. Obviously, that was just an excuse - no one really wants to start a war and risk hundreds of thousands of lives just because one man died. Same thing here in the States. Back in the Mexican War (1848),
we attacked Mexico. Mexico attacked us on "American soil" (which at the time, was actually Texas). 

Same thing happens in the markets. If the bulls want to make the market price go up, they need to find an excuse for their operations. They need to find a "reason" to do what they need to do. 

Thus, the easiest excuse to find is in the news/media. Investors will use the news merely as an excuse to push the market their way. Here's an example. 

On August 21, we had a wild day. August is typically a really quiet month, so without any major news or pieces of economic data, it's hard for either the bulls or the bears to push the market in their direction. However, on August 21 a small piece of news was set to come out - the FOMC (Federal Reserve) Minutes. This honestly has no value, because we already know what happened at the latest Fed meeting. However, this is significant enough to be used as "ammunition" by either the bulls or the bears. So on this day, both the bullish investors and the bearish investors showed up. Within 5 minutes of the FOMC being released, the bears had smacked the Dow Jones 30 down by 100 points. Within another 10 minutes, the bullish forces created a 150 point rally. In the last 30 minutes of the day, the bears smacked the market down another 50 points. 

The news is just an excuse. It doesn't move the market. Investors and traders simply use it as an excuse. In all honesty, every piece of news can be interpreted both ways. For example, the "will the Federal Reserve taper or not" has been on the minds of investors for a while. The Fed tapering can be seen in both a positive and negative light. On one hand, if the Fed tapers the main driving force behind this bull market will be gone. On the other hand, if the Fed tapers then inflation worries will ease, which aids the economy. How the market wants to interpret it is what's important. 

Troy writes about investing, trading, and finance. You can follow him on twitter @troyeconomist.

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