W E A LT H M A N A G E M E N T
PUTTING FINANCIAL NEWS –
GOOD OR BAD – IN CONTEXT
This article explains the often counterintuitive reaction of stock markets
to economic news, illustrating the fact that markets are not always
rational and it is not wise to try to outguess them.
1How Economic News Moves Markets by Leonardo Bartolini, Linda Goldberg, and Adam Sacarny, in Federal Reserve Bank of New York, Current Issues in Economics and Finance, Volume 14, Number 6, August 2008.
If you’d like to learn more, please contact Ami Forte.
Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.
The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or
publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the
information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.
Morgan Stanley Financial Advisor(s) engaged Tampa Bay Magazine to feature this article.
Ami Forte may only transact business in states where she is registered or excluded or exempted from registration www.morganstanleyfa.com/thefortegroup. Transacting business, follow-up and individualized responses involving either effecting or
attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Ami Forte is not registered or excluded or exempt from registration.
© 2015 Morgan Stanley Smith Barney LLC. Member SIPC.
CRC 1187087 05/15
PAID FOR ADVERTISEMENT
Jim Streitmatter, Senior Vice President, Financial Advisor;
Chuck Lawrence, Vice President, Financial Advisor;
Ami K. Forte, Managing Director, Wealth Advisor;
Evan P. Forte, CRPS©, Financial Advisor
Ami Forte is Managing Director-Wealth Management/Wealth
Advisor of The Forte Group at Morgan Stanley located at 4114
Woodlands Parkway, Suite 200, Palm Harbor, FL 34685 and may be
reached at 727-773-4610 or ami.forte@morganstanley.com. or visit
our website:www.morganstanleyfa.com/thefortegroup/Ami has been
featured in publications such as Business Week and The Dow Jones
Newswire.
INVESTORS’ REACTION TO ECONOMIC NEWS CAN BE
baffling. For example, positive economic announcements,
such as an uptick in gross domestic product (GDP), strongerthan
expected earnings by bellwether companies or a drop in
unemployment are sometimes followed by a market sell-off. If
the market’s negative response to seemingly good news has left
you wondering if you are missing something, you are not alone.
Are Markets Rational?
The evolving field of behavioral finance may provide some
explanation for seemingly irrational investor responses to good
or bad economic news. The discipline seeks to combine behavioral
and cognitive psychological theory with conventional economics
and finance to understand why people make irrational financial
decisions.
Practitioners have identified a set of behavioral biases that
may explain apparently unreasonable market movements. These
include, but are not limited to:
• Fear of Regret and Loss Aversion – The threat of
potential disappointment or short-term loss are powerful
forces that often inspire second-guessing of portfolio
strategies, frequently causing investors to sell winning
positions too soon or to hold losing positions too long.
•Overconfidence – Self-confidence might make people
happier, but it doesn’t make them better investors.
Overconfident investors tend to overestimate their
knowledge, underestimate risks, and exaggerate their
ability to control events.
• Anchoring – This behavior involves basing decisions –
anchoring them – on events or estimates even though they
may not reflect relevant long-term trends or statistical
probabilities.
Focus on What Matters
A landmark study by the New York Federal Reserve on the
effect of economic news on the markets may add additional
perspective. “How Economic News Moves Markets”1 suggests
that only a handful of economic announcements – nonfarm
payroll numbers, GDP advance release and a private sector
manufacturing – affect prices in significant and systematic
fashion, while most other releases tend to generate erratic or
insignificant price responses.
Generally, it’s advisable to avoid trading on news alone, as it
is impossible to consistently gauge investor reaction. Also, markets
tend to trade on future expectations over the long-term, so keep
that in mind as you confront the aftermath of news-related trading
volatility. Above all, successful investing requires a long-term
perspective. Let me work with you to forge a strategy designed
to meet your needs. 9
JULY/AUGUST 2015 TAMPA BAY MAGAZINE 73