It’s commonly held knowledge that news has an impact on stock prices. Good news can lead to increases in stock prices while bad news could cause prices to plummet. This correlation is tied to the simple economic rules of supply and demand. When there are more buyers, the high demand and low supply drive up the prices of stocks. On the other hand, a large number of sellers coupled with low demand, drives the prices of stock low.
Types of good news that spur traders to purchase more of a company’s stock include corporate acquisitions, positive earnings reports, or announcements of new products. On the other hand, lapses in corporate governance, political uncertainty, and other unfortunate occurrences cause a selling frenzy.
The interesting thing about the correlation between stocks and news is that in some cases, bad news is actually good news and good news is actually bad news — a conundrum seasoned investor Mark Denning is all too aware of. Denning shares his insights into understanding the complicated relationship between news and stock price. His advice is the result of specialized experience gained from managing multibillion-dollar hedge funds for over 30 years. Investors, both aspiring and veteran, will find his input to be useful.
When Bad News Is Good News
Denning points to the 1990s as a time when despite the bad news, it was a good time for investment. “The world was blowing up in the 1990s,” he says, “and still, that was a remarkable time for returns, a very fertile time for investment.” There was nothing good going on in the headlines, as the world was rife with economic and political uncertainty. The Gulf War, the Mexican peso plummet, the Russian financial crisis, troubles in Southeast Asia, and toward the end of that fateful decade, Y2K and the burst of the dot-com bubble.
The 1990s is but one example of investors profiting during a bad news cycle, and this isn’t because they wield some magical power. It’s simply how the stock market is structured. There’s a tendency for investors to short the stocks at the first sight of bad news. However, that also means they miss out on days when that stock performs well.
For instance, in late 2022, after a low performance in the market, many investors sold their stocks. But then the S&P 500 suddenly had a 6% jump and those who’d sold their stocks missed out on a good opportunity to reap great profits. This sudden rebound from a low to a high stock price is called a rally, and these rallies occur in the middle of a bearish market. Therefore, to perform well, sometimes you just need to hold on and ride the period of uncertainty.
A similar thing happened during Denning’s career, which he fondly remembers as a remarkable achievement.
“Back 30 years ago when Rupert Murdoch was trying to get himself out of a major hole with all his debts, the banks wouldn’t refinance him. People were shorting his stock like crazy, and his share price went from $10 down to $2 or $3,” Denning recalls. It got to the point that Murdoch’s family owned 40% of News Corp’s stock and Denning’s mutual fund shareholders held 15%, while 25% of the shares were shorted. But then, Murdoch maneuvered his company out of the mess and the share price went up by five times. And that turned out to be a big win for Denning and the shareholders he represented.
What budding investors also need to understand is that the reason why not all bad news is bad is because stocks are not absolutely correlated with the news. Rather, stock price is relatively linked with the news cycle. What this means is that news only needs to be relatively better or relatively worse. So, for example, if investors expected the stock price to go down by 10 points, and it only does down by 3 points, then it’s good news. This is because the news isn’t as bad as the investors initially expected.
When Good News Is Bad News
There are also instances when good news is actually bad news, which is often the case with news that emerges from within the company. As we’re all aware, how a piece of news is presented has a big impact on how it’s perceived. And sometimes companies present news to shareholders in a way that sounds positive but is quite bad for them. For any aspiring investor, being able to spot puffed-up news is an important skill.
“Don’t believe all the things management says. Whatever they say, check it out,” Denning advises.
Common news that’s presented as a good thing is corporate restructuring. The board will often frame their decision as a necessary step that will lead to efficiency and optimization, and ultimately, increased profits. However, restructurings can often prove to be very bad for employee morale, leading to a dip in loyalty. Restructuring is often just a short-term earning boost. However, not all restructuring is bad. The key takeaway is that investors should carefully analyze the company’s decision to see if the restructuring is aimed at short-term or long-term success.
Let’s take the example of News Corp’s troubles in the 1990s again. Back when the company was having trouble securing refinancing to settle its debts, Murdoch pacified his bankers by selling $700 million worth of stock, which reduced News Corp’s $7.6 billion debt. However, knowledgeable investors were aware that the stock sale didn’t end the company’s financial troubles, and therefore, wasn’t as good a news as it was initially perceived.
The people’s skepticism was more prevalent in the group of investors that were shorting News Corp’s stocks. They argued News Corp was reporting big profits because it was selling its assets and securities, and that nothing was really being done to bring down the outstanding debt, though these investors were proven wrong in the long run. The important thing to note here is that investors should carefully analyze news against facts and statistics.
Mark Denning: ‘Keep It Simple’
Stock prices can be affected by a variety of factors. The impact that news cycles can have on stocks can be profound. News may be extrinsic, such as economic or political. It may be intrinsic, when it comes from within the company. Investors trying to predict stock prices based on extrinsic or intrinsic news need to carefully evaluate the situation. They should look at the big picture — but also examine the finer details that can only be found in a company’s financial filings. And only after evaluating the entire situation, should they decide to sell or purchase more of a company’s stock.
Or, as Mark Denning advises, “Keep it very simple. People are right a lot of the time, but people are wrong a lot of the time, as well. And keeping it simple is quite important. It’s much easier to be wrong conventionally than it’s to be right unconventionally. And people’s truths are quite different, really.”
