Weekly Buzz: How the markets really react to news 📰

5 minute read

Markets move on news – that's no surprise. But what might surprise you is how they move, and when. See, there are two types of financial news: the kind investors see coming and the kind they don’t – and both influence market prices in very different ways.

When news moves markets

It’s the latter that typically sticks out: those out-of-the-blue headlines which make market waves. A CEO’s sudden departure, a technological leap, or an unforeseen policy announcement – those events can cause markets to plummet or soar.

But then there's the other type: the news everyone knows is coming. When earnings reports or interest rate decisions arrive, they don’t always cause a big shift in market prices – it’s not because they aren’t important, it’s because their impact had already been "priced in".

This can be explained with the efficient market hypothesis. The idea is simple: market prices take into account all the information that’s already out in the world. That doesn’t just include all the things that have happened: it includes all the things investors think might happen too.

Consider a company rumoured to be developing some revolutionary product. As speculation builds, investors drive up the stock’s price. And so, when the product is officially announced, the stock barely moves. Whether it's manufacturing data, or box office projections for the latest blockbuster, investors are always pricing in their expectations.

What’s the takeaway here?

While unexpected news can still shock prices – think natural disasters or geopolitical crises – most market moves happen gradually and continually as investors process and react to developing information. In other words, you’re often better off betting on the market’s long-term efficiency, rather than trying to predict the next big news story.

It’s why our General Investing portfolios focus on global diversification: when you're invested across a range of different markets and assets, those individual headlines – whether expected or unexpected – become only smaller pieces of a much bigger picture.

📰 In Other News: The US job market isn't ready to cool down

January saw 143,000 new jobs added in the US – a bit below the expected 170,000 – while figures from previous months were revised upward by about 100,000. US workers are seeing meaningful wage gains too, with average hourly earnings up 4.1% over the past year. Add to that an unemployment rate of 4% and the picture looks fairly robust – even if hiring has slowed from its post-pandemic pace.

Here’s the but: inflation expectations jumped from 3.3% to 4.3%, hitting their highest level since November 2023. This increase, driven by concerns over the US president’s talk of tariffs, could influence how the Federal Reserve approaches monetary policy this year.

The Fed kept interest rates steady between 4.25% and 4.5% at their last meeting – prudent, given the strength of the job market and fears of inflation rearing its head again. Traders are now betting on a rate cut in July rather than March, and see a 60% chance of an additional cut by year-end – down from 70% before the jobs report.

These articles were written in collaboration with Finimize.

📖 A Little Context: Efficient market hypothesis

The efficient market hypothesis, developed by Eugene Fama in the 1960s, changed how we think about markets and investing. With thousands of investors constantly trading, prices quickly adjust to reflect any news, making it nearly impossible to "beat the market". But there’s still room for debate – after all, if markets were perfectly efficient, we wouldn't have bubbles or crashes. The hypothesis has, however, stood the test of time, becoming even more relevant in an age of instant information.

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