Market Expectations

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In another section, we discussed some of the government data that affect the market in one way or another. For example, we talked about how high employment can start inflation because it means that there are more people with money to spend, and this drives prices up. We want to, once again, emphasize why the market sometimes does not behave the way you might expect it to with the announcement of some new economic news. Stock prices are affected when the government's economic data are released to the public only if the numbers people expect the government to publish are different from the numbers it actually publishes. This is very important to understand so we will go through it more slowly here.

Opinions Of "Experts" and Investors
At any given point in time, financial experts (and other professional investors) take a guess at the economic numbers that will be published by the government. Some of these experts work in companies such as Merrill Lynch & Co., and J.P. Morgan that spend millions trying to predict what the GDP, inflation (the CPI), the discount rate and employment rates will be the next time the government publishes these numbers. At the same time, other people involved in the market such as stockbrokers, also form their own opinions. Eventually, all these opinions come together and reporters will say things like "analysts say that the unemployment numbers, which will be published by the U.S. Department of Labor next week, will be 4.2% for November" or "Wall Street expects the Federal Reserve to raise the discount rate by 1/2 a percent."

The Opinions That Affect The Market
Remember that even though these are the opinions of the experts, these opinions can affect the market immediately even before the actual figures are published. When the government publishes the true numbers, a couple of things can happen. If the government's numbers match what the experts predict, the stock market will probably not move very much. If, however, the actual numbers are worse than or better than predicted, the stock market will move in one direction or another. Therefore, the difference between expected economic figures and what the economic figures actually turn out to be is the key to the changing fortunes of the stock market. To drive the point home, in a front page story in The London Financial Times titled "Fed Increases Rates to 5.75% Amid Fears Over The Spread Of Expansion," the writer said the following:

"Financial markets were little moved by the widely expected decision (to raise rates)".

Here, the newspaper is saying that the market already assumed that the rate rise was going to happen anyway so stock prices had already adjusted (in anticipation of a rate hike) before the Federal Reserve raised rates. When the Federal Reserve Bank finally increased rates, nothing happened to the stock market because the market had already adjusted before the rate hike. So, you can see that what we have been telling you actually happens in real life.