Investing is a game of expectations

Have you ever wondered why a good earnings result is sometimes met by a drop in the share price? Or maybe why stocks rise even after poor economic data has been announced to the public?

There are many instances where it is hard to explain the daily movements of shares due to the contradiction between news and price. In our opinion, these unexpected movements are directly related to human behaviour and the expectations investors have in relation to a certain company or event.

Traders and investors buy and sell based on what they believe future news will be, whether that is tomorrow or next month. So when investors are nervous and cautious about the earnings of a company, they lower their expectations and have a tendency to sell prior to the earnings announcement.

If the earnings are not as bad as they originally feared, shares are inclined to increase as investors buy the stock back.

When the Global Financial Crisis hit top gear in the early part of 2009, the markets started to rise much earlier than the economy, as expectations of an improving economy in the latter part of 2009 caused investors to buy stocks again. By the time the economy had shown signs of improvement, many markets around the world had risen approximately 50%.

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