Opinion: For U.S. Stocks, It’s ‘Buy The Rumor and Sell The News’

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An American flag hanging from the New York Stock Exchange building. Photo via Wikimedia Commons

By Mickey Welcher

The market has broken out to all time highs in the past week and looks like it will continue to rise over the short term. All sectors are up as investors continue to be bullish on all the good economic things to come from our new President’s campaign promises.

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This momentum is called “buy the rumor, sell the news.” Investors tend to purchase stocks based on the speculation of what will happen. We see this when a company makes a bid for another, (see Kraft Heinz’s recent interest in Unilever) or in advance of a new product release. Apple gets a nice bump in their stock price nearly every time they promote the upcoming launch of a new iPhone version. Once that rumor becomes actual news, though, the stock typically sells off as investors take profits.

This is a very common scenario in the market. Unfortunately, individual investors tend to get the short end of these opportunities. That’s because many will run out to buy the stock after the news comes out only to be left with losses when prices fall later.

Mickey Welcher

Now look at what’s happened over the past several months. President Trump has talked extensively about tax breaks and infrastructure spending. Both are very positive for economic growth, but no specifics have been outlined, let alone debated in Congress, as of yet. Instead, the rumors of what may occur are driving stocks higher across the board. This will probably continue for the next few weeks as we wait to get concrete plans — the actual “news” of what will occur.

The only remaining question is to what degree investors will sell off when Trump’s budget proposals get enacted. I predict that if the spending and tax cuts Congress and the President make fall in-line with expectations, the sell-off will probably be short lived. If the news is not up to what the market predicted, the profit taking will be worse than anticipated. There’s also a chance that we get better than expected news, and that will drive the market higher as investors go back to buying in rapid fashion.

“Buy the rumor, sell the news” is a real phenomenon, and is the primary driver of the market today. With the year-end earnings season over, investors have only their predictions and government reports to decide whether to buy or sell. For now, there’s still room for more upside as we wait for the President to release his tax plan and economic policies for economic growth.

Mickey Welcher is founder of Envestim, a low-cost financial advisory firm for anyone looking to start or manage their portfolio. He can be reached at mickey@envestim.com.

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