Why Bad News Benefits The Stock Market

Market Adventures: The Journey to Financial Freedom

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Money flows like water, in the direction of least resistance. It flows where it can multiply

Shoutout to the book “The Market Maker’s Edge” by Josh Lukeman

There are several places it can flow, these are the most notable

Bonds

Securities (stock market)

Dollar

Gold

Investors are always looking to park their money in places where there is the best growth potential.

Government and corporate bonds offer safer returns with a set growth. Investors watch this closely because this is typically the safehaven when they anticipate stocks going lower.

If the market has a reason to believe stocks will go higher, they move their money into stocks.

Important piece to note, and you can go read the book or google this if you need to know more, but the Fed lowers interest rates (interest on money borrowed) to spur economic activity and raises it to slow the rate of inflation. (There’s a lot more to this, entire books and courses, but just understand that small piece). Our goal is to keep it simple. Rates up to slow economy, rates down to speed it up. Boom

Economic data and news gives the market an idea of where they should be looking for the best growth

If the economy is bad, the Fed lowers rates...which lowers the return on bond investing, which means what?

Investors move their money from low interest bonds into stocks...causing prises to rise.

So, when unemployment goes up the market anticipates interest rates to stay low or go lower because the Fed wants to increase employment. The thought. Stimulated economy = more jobs.

Low interest rates means cheaper borrowing for businesses. That causes them to invest more in growth because the money is cheap. And That increases asset prices.

This works almost across the board with economic data. When bad economic data points to lower rates, money moves into stocks and business, lifting the market. And that of course implies the inverse is true

Pandemic examples:

Stock market going up in the middle of the pandemic with people dying, high unemployment and increasing cases

Feds keeping rates low for years, also adding demand through their own purchasing raised stock prices

Stock market going up with new variant and UK lockdowns

Increased potential for stimulus...free money which again increases asset prices

Now this doesn’t work for really really bad news. If the news is bad enough, money will typically flow into Gold or bonds because the money doesn’t like uncertainty and looks for the safest places

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