Why do stocks often rally during bad events?
By:Matt Krantz
Q: Why did stocks rally amid NATO‘s assault on Libya and even as the situation with Japan’s nuclear reactor worsened? Are investors really that callous?
A: The stock market is a cold-blooded market place for investors to trade securities. It’s not humanitarian, politically correct or even polite. When news breaks, computers instantly adjust their models with any new inputs with the hope of measuring how changes in the world will affect stock prices. These calculations might be done by a person or, more likely, by computers specially designed to measure how news affects stock prices. When such calculations result in investors betting that stock prices are too low or too high relative to news, traders place their bets by buying and selling shares. It’s about money, not about feelings for the human condition. It can sometimes be surprising to some to see just how methodical investors can be. Following the earthquake and tsunami, many insurance analysts released reports estimating how many people would be killed, and translated that into a hit to insurers’ earnings per share. Similarly, despite the human strife in the Middle East, many analysts looked at the event in terms of how it might affect the price of oil and the global economy. But don’t confuse the market’s analytical approach to measuring the economic hit of disasters and war, with accuracy. Investors can, and often, get things wrong in the short-term in their haste to forecast the future. For instance, when news of the earthquake and escalating nuclear emergency hit U.S. investors on March 15, the Dow Jones industrial average initially plunged nearly 300 points. But later in the day, the worry eased and the Dow closed down just 138 points at 11,855. The next day, the Dow fell again, by 242 points, to 11,613. But then, and this gets to the root of your question, investors started buying stocks back. Despite reports that the reactor was emitting radiation at the same time of a NATO’s attack against Libya, the Dow rose despite news that day there might be a breach at one of Japan’s reactors. Traders routinely find themselves in a difficult spot in the short term. They make big decisions on large sums of money, often, with little to no information. Traders can’t wait the weeks it’ll take before a full assessment of the news is available. They must act now and they must act without emotion. But don’t take this the hard way. The market’s rapid reaction to little news can be an advantage if you’re a long-term investor. Investors can usually just hold on and do nothing during events like the Libya bombing and Japan situation. And oftentimes, that’s exactly the best thing to do.


Twesitval is an international charity event that uses social media to help organize local meet-ups around the world. This year’s Twestival had several meet-ups planned for Japan but those had to be canceled because of the need for help following the earthquake and tsunami.


This social good community has organized #TweetDrive4Japan.
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