COLLEGE PARK, Md. (Feb. 13, 2018) — Good economic news does not always translate to stock market gains, which can baffle even the president of the United States. “In the ‘old days,’ when good news was reported, the Stock Market would go up,” President Trump tweeted on Feb. 7, 2018, during a historic Wall Street correction. “Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”
Accounting professor Rebecca Hann at the University of Maryland’s Robert H. Smith School of Business, says share prices often drop when companies collectively exceed expectations — even during the good old days. Her research traces the counterintuitive market reaction to the influence of Federal Reserve monetary policy.
She says savvy investors understand that the Fed likes to raise interest rates during growth periods, which tends to drive stock prices downward. So investors brace themselves for the impact following a robust earnings season — like waiting for the other proverbial shoe to drop.
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“When earnings news is good, investors anticipate that the Fed is going to take action,” Hann says. “It’s about expectation.”
In a recent paper, published with two Smith School PhD students in the Journal of Accounting and Economics, Hann quantifies the link between earnings surprises and monetary policy using Federal funds futures data.
She says the information is useful because it can help analysts forecast the Fed’s monetary policy. “Everyone watches the Fed’s next move,” she says.