Why Bad News Benefits The Stock Market
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\nMoney flows like water, in the direction of least resistance. It flows where it can multiply
\nShoutout to the book \u201cThe Market Maker\u2019s Edge\u201d by Josh Lukeman
\nThere are several places it can flow, these are the most notable
\nBonds
\nSecurities (stock market)
\nDollar
\nGold
\nInvestors are always looking to park their money in places where there is the best growth potential.
\nGovernment 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.
\nIf the market has a reason to believe stocks will go higher, they move their money into stocks.
\nImportant 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\u2019s 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
\nEconomic data and news gives the market an idea of where they should be looking for the best growth
\nIf the economy is bad, the Fed lowers rates...which lowers the return on bond investing, which means what?
\nInvestors move their money from low interest bonds into stocks...causing prises to rise.
\nSo, 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.
\nLow 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.
\nThis 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
\nPandemic examples:
\nStock market going up in the middle of the pandemic with people dying, high unemployment and increasing cases
\nFeds keeping rates low for years, also adding demand through their own purchasing raised stock prices
\nStock market going up with new variant and UK lockdowns
\nIncreased potential for stimulus...free money which again increases asset prices
\nNow this doesn\u2019t work for really really bad news. If the news is bad enough, money will typically flow into Gold or bonds because the money doesn\u2019t like uncertainty and looks for the safest places
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