How does the media seem to know the reason for every change in the stock market?

Question

Ever notice how CNN, FOX, etc. comes up with an explanation for the stock market rising or falling on a given day? They seem to pinpoint the reason for the change in the market, like "improved consumer confidence in stock 'x'" caused a 200 point gain, then the next day they'll tell you that "continued housing woes" made it drop like 300 points - as if investors didn't know that the housing market is dismal already. Where do these explanations come from? How reliable are they - thoughts?

Answer 1

They make guesses. They ask some expert somewhere, could be their broker, could be some analyst they are wanting to interview. Concensus stories are also found in places like the Wall Street Journal, an authoritiy in its own right, and a PR person from an exchange. Mostly, it is a generalistic gloss based on news that seemed to happen just before a big market move.

Answer 2

In finance, stocks are priced based on information affecting anticipated future earnings, so whenever new information comes about that is not already reflected in the current share price, larger institutional investors (who often comprise a lot of the trading of stocks, and will tend to have a greater influence on indexes than small consumers) may either buy or sell at a higher or lower price depending on the information. It is important to remember however, that larger price changes are attributable to changes in these expectations, so a 10% profit increase is considered bad if most large companies had valued stock prices based on a 12% increase, and vice versa, bad news like 20% loss is good news if most anticipated a 50% loss.

As already mentioned, they are not always reliable, and may sometimes wrongly attribute changes to factors which may not have played a part, simply because it sounds unintelligible to state that changes today were due to a culmination of random small changes. When determining the relevance of the reasoning it is important to consider the determinants of a companies future earnings or costs (e.g. an unanticipated improvement in consumer confidence suggests stronger sales for retail sector).

In the long term, whether they are wrong or right, news such as this is a terrible source to try and make any quick money. From an academic perspective, the stock market is quite "efficient ", so new information is quickly absorbed into the prices so that only the fastest decision makers are able to profit or limit their losses.

Answer 3

The markets only move because of supply & demand of shares of stock, just like any other item. But economic news and such can have an effect on investor's willingness to supply (sell) or demand (buy) shares. So when news comes out, and the market changes direction immediately afterwards in a way that makes sense based on current economic theories, or observations then the media comments on it.

For instance, when the Fed cut interest rates by 50 bps not to long ago the stock market almost instantly began to rise rather dramatically across the board. Why? Because lower interest rates are considered generally positive for stocks. There are many reasons, companies have lower borrowing costs, dividends become relatively more attractive to the lowered bond yields, the risk premium for investing in stocks over the "risk free rate of return" expands causing P/E ratios to expand, etc... and while it would take sometime for these changes to actually have an effect on the actual company's results, investors can project likely results into the future, and base investment decisions on what they project.

Do these observations explain all of the movement? No modern financial markets are far too complex, but they are usually reporting on what probably was a singificent factor in the movement, but they are only reporting on what they preceive to be the reason for a movement.

Answer 4

Its because they have scheduled 15 minutes to talk about it, so they find somebody that looks nice on camera and can read a teleprompter. Then they conclude that whatever happened today is because or despite of today's news.

In mathematics, if you can change one variable in the equation without changing the solution, that variable has no effect and can be discarded. Like the business news.

Answer 5

Millions of pieces of information affect the prices of stocks, and since information is a constant stream, changes in stock prices will occur constantly. To pick one thing as the cause is a complete oversimplification, basically a guess.

Answer 6

They may come up with explanations, but it doesn't mean they are correct. The financial media, like the media in general, is full of pundits and commentators who like to sound knowledgeable but often are full of hot air. A lot of their predictions turn out to be wrong, too.

Answer 7

Its a guess. They just associate it with whatever is happening at the moment. A correlation between events. People want answers so they try give it to them.

Answer 8

80% of the time they are just spouting BS in order to have an answer.