One of the many things that make investing hard is that everything is dependent on context. What is good news in one period is bad news in another.

A paper, “Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets” by Torben Andersen et al. looked at this effect as part of a larger project that studied how fast markets incorporate the information from macro-economic announcements.

This experiment was performed using data from 1998 to 2002. The researchers studied the reaction of equity indices and bond futures for the US, UK, and Germany and dollar/pound, dollar/yen, and dollar/euro. The new information came from scheduled US macroeconomic releases such as non-farm payroll, CPI and GDP.

What they found is that markets don’t wait. New information is absorbed almost instantly, or at least in the five minutes they were able to narrow things down to. And it is almost certain that the absorption is even faster now. Computers are much faster than humans in trading jackets.

This is interesting for a couple of reasons. First, it conflicts with the rationale usually given for the existence of post-earning announcement drift where stock prices are thought to incorporate the new information over weeks and even months. This is a tangle for financial economists to sort out, although it does show the problem that can arise when psychological reasons are given for an effect. It isn’t clear how markets can incorporate news both instantly and slowly. Perhaps market-level news is different from stock-specific news?

But practically speaking, it means that trading indices and bonds on the basis of this news is pointless. By the time you have read the headline, the game is all over.

But it gets worse. Even if you knew the headline, the relationship between that news and the market’s change is uncertain. What is good news in one environment is bad news in another.

During expansions, strong economic news (like a jump in employment or GDP) tends to lower stock prices. Why? Because it often brings fears of interest rate hikes—which raise discount rates and reduce the present value of future earnings.

But during recessions, good news boosts stocks, as it signals recovery. The effect flips.

This nuance explains why many studies find only weak links between economic news and equity prices: they’re averaging over periods where the direction of the effect changes. It’s not that stocks don’t respond to fundamentals—they just do so variably.

This could explain the results of a recent study by Victor Hagani and James White, “When a Crystal Ball Isn’t Enough to Make You Rich.”

It documented an experiment designed to study whether advance knowledge of financial news was enough to guarantee profitable investing. 118 finance-trained participants were given $50 to trade S&P 500 and 30-year Treasury bonds using the front page of the Wall Street Journal (WSJ) one day in advance. The study used 15 high volatility days over the period 2008 to 2022.

Spoiler: they didn’t do well.

The average profit was $1.62 which was statistically indistinguishable from zero. But 45% of the participants lost money and 16% went broke. Because participants were free to make different sized bets on different days, the experiment was really a joint hypothesis test encompassing predictive ability and sizing ability. Nonetheless, the study showed that making money from fundamentals views is hard.

This seems counterintuitive. Surely knowing stuff helps. The problem is that the market reaction depends on the aggregate interpretation of the news, not your interpretation of the news. So, to beat the market based on news, you need to both forecast the news then forecast what the market will do.

And you are just one of the millions of investors trying to do the same thing, largely by looking at the same information and thinking about it in the same way. All this analysis is priced in.

This type of situation is also seen in sports punditry. Networks employ ex-coaches and players to opine on games and predict winners. These people know far more about the sport than any outsider will. Yet only a few of these pundits are profitable when evaluated against the betting spread.

Obviously, there are gamblers who consistently win. Equally, there are investors who consistently beat the benchmarks. But they don’t do it with knowledge of the sport or economics. You have to step back and use data that won’t be already priced in.

So, the bad news is that markets move too fast for you to be able to invest based on new information. The other bad news is that even knowing the news probably won’t help. There is no good news today.

Disclaimer

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