Tweets, The Flag, Charlottesville, North Korea & Afghanistan: Why the Market Usually Doesn’t Care
There is a lot going on in the world and it is not surprising that the ongoing drama works its way into the financial media narrative. To best understand the market’s reaction to domestic and world news, it helps to have a short review of media economics. The number one purpose of the media is to make a profit for the parent company and ultimately to the shareholders that own the parent company. Everything else is secondary. In order for the financial media to make a profit for the shareholders, they must sell advertising.
Advertising math is simple. A company that wants to advertise will pay a higher fee to hit more of its target audience. Each financial program is ultimately trying to get as many viewers, listeners or readers as possible. If a financial program is popular, it attracts more advertising business and thus higher advertising fees, which produces profits to the parent company and then to the shareholders. Successful programs are those with the most viewers, listeners or readers, not the ones with the most reasonable or coherent information. Sometimes, and it appears only sometimes, that can be one in the same. Unsuccessful programs, which are those that do not sell a lot of high-priced ads, are pushed to off hours or ultimately cancelled.
The media knows that chaos and hysteria brings in viewers. Because of this, it is in the media’s best interests to feed the anxiety of the viewer, and definitely not to reassure him or her. You are far more likely to watch the Weather Channel if a storm is in play, and far more likely to turn the channel once they assure you everything is most certainly under control.
The rules are the same with the financial media. With every twist and turn in the political arena, the financial media wants to know how the events will impact the markets. It does not matter if it is Charlottesville, North Korea, Afghanistan or whatever turns out to be next week’s crisis. It is a good thing to educate the viewer, do not misunderstand, but many Americans have a lot of anxiety around all of these issues and the impact on their finances. Learning how to navigate the information that you receive in the financial media is important.
Since the financial media is designed to heighten (not dampen) anxiety, that results in an inordinate amount of “experts” commenting on how the most recent crisis will surely cause a market decline. Here is the crux of the issue, which is really quite simple: the stock market only cares about one thing…anticipated earnings. I can hear some of you ruffling your paper or cursing at your computer screen with disgust. Surely the market cares about protests, North Korea, Afghanistan and President Trump’s most recent tweet. I can assure you, it most certainly does not. Let me repeat, the market only cares about anticipated earnings.
Now, most things do matter to varying degrees. For example, if the Charlottesville event replicated throughout the country dozens of times, the markets would likely react negatively, anticipating that the unrest would cause consumers to “cocoon.”1 If North Korea drops a nuclear bomb on Guam, or anywhere for that matter, surely the market would go down? Heck yes it would. It would likely lose half its value in one second. However, the market views this as an extremely low probability event. And by low probability, I do not mean 1 in 100 but 1 in 10,000. If the market thought this had a 1% chance of happening, it would have adjusted downward.
The bottom line is that the market is looking at:
To personalize this a bit, let’s talk about you for a second.2 You likely have very strong personal opinions about events like Charlottesville and North Korea. You likely follow the news closely. But, you likely did not change your personal spending behavior one bit, regardless of all you may have seen, heard or read in the financial media. You still went out to eat, shopped at the grocery store, went on vacation and made any other minor and major purchases you were planning on making.3
This is why the market did not even blink. It sees these events the way you do. They are not ideal, but the way these issues stand today, they likely will have no impact on your spending and therefore little impact on corporate earnings. And at the end of the day, that is all the markets care about, and why despite the political divide and heated rhetoric, the markets are presently walking on sunshine.
1Not like the 1985 Ron Howard movie. More like post 9/11 where everyone just stayed home until they felt safe again.
2In this case, it is likely you are like everyone else. We all hate hearing that, I know.
3Much like my colleague who came into my office and said, “Can you believe we are on the brink of nuclear war? Let’s go to Chipotle.”