The Market Never Looks Behind
Many people think that the stock market "reacts" to events that have already happened. While this is logical it's actually the opposite: the stock market isn't reacting to yesterday's news, it's worried about tomorrow. What do I mean? Let's dive in!
Don't Just Take My Word...
For example, in the infamous crash of 2008, many people say that the market crashed because the banks failed, but did the stock market lose all that percentage in the one day the news hit, then never thought twice? No. Stocks were already slipping before the news of banks failing hit the papers. By the time the big drop did hit, it was already priced in; what made stocks plunge even further was when the situation was worse then expected, meaning the possibility of rebounding in the future was looking more unlikely at the moment. Then the recovery followed in March of 2009. Choosing this time to recover made no sense on a day-to-day basis in the market: unemployment was still rising, headlines were pessimistic, and people were still heavily feeling the effects of the crash. And yet the market was rising and expectations were improving.
Earnings Reports
An easy company to pick on when it comes to this exact theory is NVDA, though the list is endless. Many beginner investors look forward to a day that is heavily in the green after their company beats earnings expectations; but the question should never be if the company beat their expectations... did they beat Wall Streets? If investors are expecting the moon – like they often are for NVDA – they are sad when the land on a measly star 5 feet from the moon. Same thing can be said for expected losses in a company; TSLA often has these. If the company lost less money then expecting that is music to investors ears. At a glance this seems contradictory, but remember the market doesn't look at today but tomorrow. Not beating the outlandish expectations investors had for a company makes them upset with that company – even doubtful for the future. Meanwhile, a minimized loss can bring hope to bag holding investors.
Is the Market Rigged?
When hearing this news, investors often take it as "the stock market is rigged". And if a logical conclusion for the future quantifies as a rigged market, then sure. But don't let that turn you off from using it to your advantage. If you had the winning lottery numbers that you knew were correct, the lottery may be "rigged" but would that stop you from using it to your advantage? Probably not, don't let that happen to your next investment.
*This article is for informational and educational purposes only. It should not be considered financial, investment, or trading advice, nor a recommendation to buy or sell any securities or financial instruments. Past performance is not indicative of future results. Markets are volatile and unpredictable; no indicator is foolproof.