It can be confusing watching equity markets fall on what seems like good news - or rise when the world appears chaotic. You hear that the economy is strong, employment is high, and inflation is stable, yet your portfolio declines. It can feel like the market misunderstood the news, is broken, or worse, rigged. But there’s a more logical explanation: the market is focused on the future, not today’s headlines.
There Is No Value in Yesterday’s News
The market is always forward-looking. Unlike the nightly news, which reports what happened today, the share market focuses on what might happen tomorrow. Investors try to predict the future - company earnings, interest rates, and global events. As a result, the market reacts less to what just happened and more to what it anticipates next.
For example, if the government announces strong job growth, you might assume that’s good news. More jobs mean more spending and company profits, right? But the market may view it differently. Strong employment can lead to wage inflation, making it harder for businesses to hire without raising costs and reducing margins. It could also signal an overheating economy, prompting central banks to delay rate cuts - or even raise rates again. Higher rates increase borrowing costs for companies and consumers, potentially shrinking profits.
So, despite today’s strong jobs data, the market may focus on tomorrow’s squeezed margins.
Interest Rate Impacts Aren’t Straightforward
Interest rates play a significant role in market performance. In theory, when rates rise, borrowing costs increase, economic activity slows, and earnings decline - hence, higher rates are seen as ‘bad’ for shares.
But it’s more nuanced. Markets sometimes rise even during rate hikes. Why? If rates are increasing because the economy is growing - more hiring, strong consumer spending, rising profits - investors may prioritise future earnings potential over current borrowing costs. Equity markets can still rise in such environments.
This especially holds true if central bank actions are moderate and well-signalled. Investors typically prefer slow, predictable hikes over policy surprises or runaway inflation. Markets dislike uncertainty more than they dislike rising rates.
New Zealand has not enjoyed such predictability in recent years. Poorly timed or reactionary central bank decisions have caused investor unease, highlighting how central banks’ credibility influences market behaviour.
When Bad News Can Be Good
Conversely, weak economic data - slowing job growth or reduced consumer spending - can sometimes trigger market rallies. If bad news signals a cooling economy, central banks might hold or cut interest rates. Lower rates can boost confidence, encourage investment, and drive-up share prices. In this sense, bad news becomes good news.
This dynamic confuses many investors raised to believe a strong economy equals a strong market. In reality, markets are always trying to predict the next move from policymakers rather than simply reacting to the day’s economic reports.
War! What Is It Good For?
There is no doubt that war, in any form, is a tragedy and waste of human life. And when compared to the loss of human life the discussion of markets seems trivial and often distasteful.
But history shows that markets respond to geopolitical crises - and some sectors even profit – so what does conflict means for your portfolio?
Most assume war is bad for markets. In the short term, that’s often true. Uncertainty spikes, oil prices rise, and investors typically seek safe-haven assets like gold or government bonds.
Riskier assets, including equities, are sold off.
However, certain sectors can benefit. Defence companies may see share prices rise with increased military spending. Energy producers can gain if conflict disrupts supply, pushing up prices. So, while overall markets may decline, some areas perform well. And if investors believe a conflict is contained, broader market impacts may be limited.
Take June this year, for example. Despite direct U.S. military involvement in Iran and open conflict with Israel, the reaction was muted. Oil spiked 10% on the day of the U.S. strike but stabilised within two weeks. Major U.S. equity indices fell less than 2% and were soon at 52-week highs. U.S. Treasury yields, a classic safe haven, initially dropped but soon rose again - driven more by inflation fears from higher oil prices than flight to safety. Yields ended the month largely flat, suggesting investors were more worried about inflation than war.
Rosy Red News, Bleeding Red Portfolio
As an investor, it’s frustrating to read headlines like “inflation easing” or “GDP growth strong” and still see red in your portfolio. That doesn’t mean your investments are poorly positioned. Markets often price in expected good news in advance. If the data aligns with forecasts, there’s no reason to move prices higher.
In fact, exceptionally good news can spook markets. It may signal that rate cuts will be delayed or even reversed, applying downward pressure on valuations. This is the paradox: markets don’t react to what happened - they react to what might come next.
Staying the Course
Markets are complex and often seem contradictory, but they’re not irrational. They’re forward-looking. That’s why their short-term movements can appear out of sync with today’s headlines.
The best strategy is to focus on the long term. Market volatility is normal. If you’re investing in quality companies or well-diversified funds and giving your investments time to grow, temporary confusion doesn’t need to shake your confidence.
The market may not always make sense today - but over time, it tends to reward those who stay patient and stay invested.
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