The Reason That “Bad” Economic News is “Good” for the Market

By Gary Brode, Deep Knowledge Investing

At various times, there have been situations where economic news that was better than expected led to an immediate market decline, and where negative or disappointing economic news led to the market rising.  This effect has been particularly pronounced this year.  Ever wonder who’s benefiting from a bad economy and want to know what’s happening here?  Let’s explore the issue.

Is the Market Rigged?:

At some point, everyone has heard accusations that the market is rigged in favor of the powerful.  Unfortunately, there are some disturbing examples that lead people to believe these things.  There were widespread rumors during the invasion of Iraq that Halliburton, a company tied to then Vice President Cheney, was benefiting from the war.  On the other side of the aisle, many have noticed that Paul Pelosi, the husband of Speaker of the House, Nancy Pelosi, has a habit of making big profitable investments just before legislation that affects that industry is announced.  It’s not hard to draw a line between Speaker Pelosi’s knowledge of upcoming policy changes and husband Pelosi’s investment timing.

In addition, the big investment banks can also be a source of misleading information as they tend to hand out “buy” ratings to any company that could be a future client.  The research appears to be written to help the investor, but it’s really advertising for the underlying company in exchange for banking fees.  We’ve pointed out many times that’s why independent research is so important.

These bad examples aside, for the most part, the US securities exchanges are relatively transparent, fair, and well-regulated.  I believe the SEC makes an effort to try to regulate markets in a way that they believe is fair for both large institutions and individual investors.  Most companies have a robust compliance department, and while fraud and misleading financials exist (as they do in every market around the world), in general, public companies in the US provide good disclosure on the state of the business at least four times a year.