The TILE team had mixed reactions to all of these news events… reactions that may be familiar to anyone watching the newspapers or trying to read the markets. Across all topics, initial optimism about each item seemed to fade the more the team thought or read about it. Regarding the capping of the oil well (a seemingly great piece of news), there was a great deal of skepticism: “I don’t believe it,” and “this is a very minor victory considering the damage that’s already been done.” On the financial reform bill, there was a lot of confusion about what the legislation meant and whether it would actually improve the financial sector. The Goldman settlement evoked a lot of different reactions, from the positive to the unimpressed to more socially focused, such as “what do people around the country think?” and “I have friends who intern there – how will this affect them?”
These reactions to the news are a great example of what happens in the market every day. While the intensity and timeliness of decision making differs between investment professionals and young adults, the way a big news event can impact our thinking and subsequent actions is similar. Initial reactions to events lead to decisions to become more bullish or more bearish; sometimes they lead to rapidfire decisions to buy or sell stocks.
Zooming out a bit, some investors consider how news events impact the broader economy or sector. For example, does new financial regulation mean that U.S. banks will be competitively advantaged or disadvantaged compared to global competitors? Will it encourage growth in loans, revenues, and earnings? In other words, does the financial industry pie get bigger?
Zooming back in, investors also consider the impact news has on a specific company. For example, how does the financial regulation bill impact one firm versus another? Who will benefit more (or hurt less) in the future… Citi or J.P. Morgan? Understanding the unique position a particular company is in (overall health, profits, projections, plans, and management), helps investors assess how big and small events will impact that company’s financial situation. In other words, they can predict which company is going to get the biggest piece of that pie.
So what does this mean for the TILE Community? First, it is important to recognize that data is only data… unless you use it to reach conclusions. I always remember my high school history teacher, who explained the difference between an A paper and a C paper. The C student lists dates and facts, but the A student uses those dates and facts to consider what they mean for the future. Second, newsworthy events don’t necessarily have to change your outlook about the state of the economy, the market, your job prospects, or your future plans. Not every piece of news provides clarity – as the famously dense financial regulation bill demonstrates. Moreover, each individual’s tolerance for risk (or lack of certainty) will impact their “move to action.” Some investors watch fluctuations in the market from a distance, comfortable in their existing investment strategy. Others try to chase profit by buying and selling stock as news unfolds. Part of what I think makes the market interesting is that not everyone reaches the same conclusions. You’ll arrive at your own conclusions, too. TILE is here to help you understand Spending, Growing, and Giving… but mostly we’re here to help you figure out your financial identity, so you can make your own decisions about how to approach your financial life.
- Amy