What Does the Market Listen to?

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I was perplexed when I got this question not too long ago.  My first impulse was to respond with a single word: “Everything.” Market participants are always gathering all the information and insight they can about investments in which they have a position or an interest. At any moment, some investors have an interest in just about every possible investment; thus the market as a whole is looking at everything.  Think of the mythical Argus, the monster with at least 100 eyes that never sleeps.

But after further consideration, I decided that my questioner was getting at something more subtle.  Though it is true that the market looks at everything, it also seems that at any point in time it focuses on particular issues – some that are specific to a company, others that are more widespread in their impact. I decided it was to these matters that my questioner referred.

Though some things attract attention more than others, they are never the same things.  What seemed of crucial importance last quarter may hardly be mentioned today.  For instance, as I write this afternoon, the buzz is about the Federal Reserve’s (Fed) interest rate policy.  The Fed’s policy-making body –– the Federal Reserve Open Market Committee (FOMC) –– is meeting to decide whether to cut interest rates, and so all of Argus’ 100 eyes appear to be on Washington.  By the time you read this, the Fed will already have made its decision, and market participants will know where things stand for the next few weeks, and so they will already have moved on to other issues — perhaps foreign trade or the credit card hacking at Capital One, with its implications for that bank and other financial firms.

To some extent, the media plays a role in these sequential shifts in what market observers focus on:  Reporters have to have a topic; they ask prominent investors their thoughts of the moment and then cover that topic with the expectation that more readers will have an interest in that article than one about another topic.  This shifting happens so quickly that no individual investor can keep up with the flow, much less get ahead of it.  Sometimes the investor who pointed the journalist to a specific issue will have moved on even before the story is published.  Over the course of a few weeks, this quick scanning of influences enables market participants –– as a group, but not individually–– to assess everything that affects all securities.

This may seem like a most difficult situation, especially for the individual investor, but it does offer bits of investment advice:

  • If the media is talking about it, the market already has long since considered what is knowable, so trading on “public news” only insures that the investor will be behind the information curve. The most useful part of a news item comes not from the facts of what has happened, or from the quotes of so-called experts, but rather from any insight the investor can glean about next stepsFor example, the Fed has cut rates.  That news is already discounted.  But is there something in what the policy-makers said that speaks to the Fed’s next move?  That is the more valuable piece of information, even though it is less definite.
  • The investor can get the most value out of what is less thoroughly discussed. While everyone is talking about the strain on Capital One, look for information about other financial firms.  Are some equally vulnerable but have not yet suffered a price decline or, alternatively, have some financial firms taken more steps than others to protect against hacking and thus stand to benefit as market participants begin to think more deeply about such risks (as they will in response to the news about Capital One).
  • Despite the insight of the last two points, most investors –– professionals as well as individual investors –– should understand that they cannot get ahead of this process: it happens too quickly, and except for scheduled meetings of the Fed and the like, too randomly. Rather than try to divine what the market has missed in the deluge of daily news, it would be better to consider the long term.  Pick investments with characteristics that meet your long-term goals. Build a diversified portfolio, as described in my earlier posts, so that it can enjoy the effects of the occasional pieces of unexpected good news while standing up to the strain of those inevitable pieces of bad news.

Of course, there are disasters that require quick sales to avoid horrendous losses.  But these are few and far between.  If your long-term analysis is good, or if you have bought an index fund or a large-enough slice of the market so that your portfolio is broadly instead of narrowly exposed, then this kind of urgency might occur only a few times in an investment lifetime.  Always keep in mind that your chief aim is to have exposure not to any specific securities, but to securities that behave in ways that are suited to your long-term goals.