The stock market often makes big moves based on short-term news. When Jerome Powell mentions that interest rates may continue to rise to combat inflation, the Dow and Nasdaq generally drop -- unless they don't because people expected worse or assume that the news was already priced into the market.
It's an inexact science where people make reactionary moves that send markets up or down based on some sort of prevailing wisdom. Basically, people take short-term news and conflate it to have long-term meaning.
The media -- of which I have been a member for roughly 30 years -- do not generally help calm the short-term hysteria.
People don't get paid to go on cable-news channels to express reasoned long-term opinions. They're supposed to fire off hot takes, which make it seem as if the Fed's rate move or the monthly jobs number has a huge impact on the stock market.
In reality, broader economic conditions clearly have an impact on individual stocks, but that's not nearly as simple as people would have you believe.
For example, a weakening economy might be worse for Apple (AAPL) because people might be wary of buying expensive new phones. Or the same economy could benefit Apple because consumers will hold back on vacations, new cars, and other expensive purchases and spend on more-affordable luxuries like streaming TV, music, and fitness, or maybe even a new phone, which is a lot cheaper than many vacations.
Image source: Jacob Krol/TheStreet
Short-Term Stock Market Moves Don't Much Matter
A lot of people day-trade and try to guess how the market might perform day-to-day or even hour-to-hour. Long-term investors buy good companies and hold them for years. That's how the average person can build wealth, and it's a strategy that does not depend on you trying to figure out what Federal Reserve Chairman Jerome Powell's comment or any Fed move means at a micro level.
Instead, every news report is a piece of a bigger puzzle. Yes, the country's long-term financial health tells you things about how various companies will perform, but isolated data points generally mean very little.
If we go back to looking at Apple, for example, the company's quarterly earnings reports often show double-digit growth in every category -- and the stock price falls after the report. Sometimes that's because investors expected more or analysts didn't like the outlook management described. But you can't judge companies based on one quarter.
When you assess an earnings report, you have to compare it with the company's long-term road map. Did Apple, for example, grow service revenue, something the tech giant has been working on for years? Are long-term sales goals being met even if they're not happening in exactly the way the company thought they might?
For example, when Apple introduces the new iPhone, in September, sales may be front-loaded or people may wait a few weeks, until the holiday season, before they buy. In a broader sense, many customers may wait until their current phone gets paid off. It's a 12-month cycle where the destination, not how you get there, matters.
So Much Noise, So Little News
It's a 24-hour/7-day-a-week news cycle, and media outlets tied to that wheel can't tell you that what's happening in the moment is one data point of many, not a meaningful, actionable item on its own.
Higher interest rates, for example, mean higher mortgage rates, which in turn could slow the housing market and bring prices down (or at least slow their growth).
That's not a simple equation. Cheaper sale prices with higher mortgage rates might increase affordability for buyers but they also slow wealth creation for sellers.
Both are interesting data points when you look at lots of different stocks, but evaluating a company's prospects is much more about how its management executes a plan while adjusting for economic conditions.
Peloton (PTON) and Netflix (NFLX), for example, have taken very different approaches to the end of the pandemic-driven boom.
Netflix always talked about how it was pulling growth forward, warning that at some point there would be quarters with slight drops. The company explained how it would get more efficient with its content spending and focus on new areas like video games to drive growth.
You can believe that strategy will work -- I'm bullish on more focused content spending and I think games are lighting money on fire. But how the company executes on its clearly explained strategy means a lot more to its future than an interest rate move or whether Disney (DIS) has an Avengers movie in theaters at this exact moment.
Peloton, for its part, has never really articulated a plan for a return to growth after the pandemic pushed forward its customer acquisition. Yes, the broader economy matters more to Peloton than it does to Netflix, but you should buy, sell, or ignore the company's stock based on whether you believe in its long-term business plan, not because the cost of financing a bike just got marginally more expensive.
The media want to keep things simple. That's why the weatherperson tells you it's going to snow, how much may fall, and what the temperature will be, not the underlying science that leads to those things happening.
It's easy to conflate single data points to stock market moves because when we get data, the market moves, but those moves don't actually speak to long-term performance.
When you consider investing in a company or selling a stock you own, look at as many data points as you can, and don't make blanket assumptions that higher interest rates or a weaker economy are bad (or good) for that company.
Remember that charts, numbers, expert opinions, and everything else are tools to help you understand the bigger picture. No one of them is the last word (and that's why TheStreet has built tools like TheStreet Smarts, Action Alerts Plus, and Real Money to help investors understand not just singular data points, but how it all fits together).
