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 Market Mysteries of the week

  Companies reported big profits, but then their stocks fell. What's that about?

Answer : Don’t try to rationalize short-term market moves. Anything you read or hear is just people’s best guesses.OK, so what’s your best guess?Our best attribution of a week of stock price moves isn’t worth anything. Let’s zoom out.Why do markets move the way they do?Markets are proactively reactionary. We just made up that phrase, but let's dig into it...An investment is a bet on the future. No one can predict the future, right? But we all try our best. Investors follow the news and research trends to form opinions about what they think will happen. As such, the stock market is always moving in anticipation of what’s to come.U.S. companies lost 30% of their value in under a month as the stock market crashed in February 2020. Things didn’t really start shutting down until late March. We wouldn’t find out about the worst effects on corporate profits until July. But by July, markets had already rebounded in anticipation of the recovering economy.Investors react to the information at hand and proactively position their money into the investments that will perform the best in their hypothetical future. Markets swing a lot because we’re human, and our outlook on the future can change by the minute. How do earnings reports affect the market?Earnings reports are what investors call the quarterly financial updates required of all publicly-listed companies. If you have public investors, you need to be transparent about your financial health. Earnings is another word for profit.When companies report on the past quarter's financial performance, it’s old news. The corporate updates will only drive big market swings if they reveal something investors weren’t anticipating.As a general rule, anything less than 2% isn’t a big short-term move for a stock.But profits are exceeding expectations. Isn’t that good?It is good but seemingly not quite good enough. For the first 18 companies that reported more second-quarter profits than investors expected of them, they averaged +18% higher profits than expected, but their stocks fell on average -0.6%. By now, investors are focused on the third or fourth quarter. They already got excited about the second quarter, which is why the stock market broke its record high 34 times in 2021 by the end of June. The market goes up because investors think it will keep going up. They were optimistic of a continued recovery in May and June. Now, they’re second-guessing themselves. Stocks fall from highs because investors worry maybe they were wrong. Maybe the economic recovery will not be perfectly smooth and exponentially profitable as it seemed for a bit. You can attribute any number of reasons - worsening covid variant spread, potential reinstatement of lockdowns, inflation fears, supply constraints, labor shortages, etc.What do investors do?They do exactly what you’re doing. Stay informed and form opinions.Investors aren’t selling a stock because of what happened. They’re looking at the new information and using it to inform their expectations of the future.A company can report losing billions of dollars and still have its share price rise. Investors don’t sell a stock to punish the company for losing money. They might see that the company’s revenue showed signs of recovery and buy the stock because they think it’s turning around. Right now, if a stock falls after reporting record-high profit growth, it might be because investors look through and see slowing demand for the company’s products or increasing prices for supplies and worry about slower profits ahead. No company can be judged on a single three-month period. It’s all about staying engaged and using the new information to evaluate whether your long-term view of the company has changed. In other words, take a step back. Do you still think this company will be growing and producing more in ten years than it is right now? If so, don't fret too much about the short-term swings. Just stay Scoopin’. Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team

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