NerdWallet's Smart Money Podcast - Money News: Navigating News-Based Investing Strategies, Risks, and Alternatives

Episode Date: February 7, 2024

Understand news-based stock market trading strategies and risks and discover alternative strategies for smarter investing. Should you trade stocks based on news events? What are alternative investment strategies to news-based trading? Investing Nerd Sam Taube joins hosts Sean Pyles and Anna Helhoski to discuss the wisdom—or folly—of news-based trading strategies, after Sean and Anna break down the latest personal finance headlines around job market trends and consumer confidence from the University of Michigan Surveys of Consumers. Sam explains how news has played out in the stock market, including some unexpected outcomes that illustrate the difficulty in predicting market movements based on news events. The hosts transition to a discussion on alternative investment strategies, such as value investing, growth investing, and dividend investing. They delve into the nuances of these approaches, offering three listener-focused takeaways to help navigate the complexities of the stock market. In their conversation, the Nerds discuss: personal finance, investing strategies, stock trading, financial news, alternative investments, value investing, growth investing, dividend investing, market trends, economic data, interest rates, consumer confidence, money headlines, job market, stock market, news-based trading strategies, investing tips, wealth management, market analysis, financial literacy, money management, investment options, economic indicators, stock market outlook, financial trends, investment decisions, news events, market volatility, economic outlook, investing education, and portfolio management. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly personal finance news roundup, where we take a look at recent developments in the world of money and then go in-depth on an issue that's important to your life and your bottom line. Today, we're going to talk with investing nerd Sam Taub about trading on news events and whether or not you should do it. First, a few money headlines in the last few days.

So, Ana, I feel like a broken record here, but to quote a certain Battery Bunny, the job market just keeps going and going and going. For anyone wanting to get a job or change a job, that's a pretty great broken record. Yeah, the Labor Department reported that employers added 350,000 jobs in January. On top of that, it revised its figures upward for December by 100,000 jobs. The unemployment rate held steady at 3.7%. And it's certainly fair to call this a trend. The economy added 3.1 million jobs throughout the year in 2023.

It's yet another data set that the Federal Reserve is considering as it ponders interest rates. Last week, the Fed's Open Market Committee chose not to take any action while it waits to see how these strong numbers, GDP, jobs, and more, balance against inflationary pressures. Chair Jerome Powell said, quote, It will likely be appropriate to start dialing back policy restraint at some point this year, meaning it will likely be appropriate to start lowering interest rates. He added that the central bank wants to see more good data. All those jobs and a slowdown in inflation may be why American consumers are feeling better than they have since July 2021, at least according to the University of Michigan's Consumer Sentiment Survey. Yeah, their index rose 13% from December to January. It said people are more confident in their personal finances, yay, as well as the economy as

a whole. Americans are also feeling confident that the Fed is going to start lowering those interest rates. But we're still a little grumpy, apparently. 41% of survey respondents said they expect good times ahead for the nation's businesses, but 48% said they expect bad times. No bueno. At least it's better than June of 2022 when 79% said they expected a loser economy. Ana, remember the big dust up over Delta's SkyMiles program last year?

I do, Sean. Delta implemented a bunch of changes to how people could accrue and use points. And to put it mildly, the people spoke and said, in essence, you do this and we'll go fly another airline and you can go fly a kite. Right.

The airline backed down a bit from those changes and now American Express is attempting to smooth ruffled feathers with updates to its Delta branded credit cards. The new cards add benefits like flight credits after you spend a certain amount on purchases, along with credits on rideshare programs like Lyft and restaurant reservations on Resi. Also, a quick note that American Express is a NerdWallet partner, but that doesn't influence how we talk about them. American Express is also expanding the program for companion tickets. The hitch is that all of this comes

with a hike in annual fees for these cards, starting at $150 and going all the way up to $650, depending on which card you get. A kite is sounding pretty good with cards at those prices. Hmm, that's what we saw and heard over the past week in Money News. Let us know what we missed and send us the headlines you've seen and want to hear more about. And now on to our in-depth look at the wisdom or folly of trading stocks based on events in the news with NerdWallet investing Sam Tao. Sam, welcome back to Smart Money. Always great to be here. Investors can consider a range of factors to inform their trading decisions, like earnings data, economic data, and even news

events. Sam, you've been exploring news-based trading strategies. Can you explain to listeners what that means? Yeah, so news-based trading is pretty much what it sounds like. It's when people try to make money buying or selling stocks or options or whatever else based on short-term news events. Okay. Can you give us an example of how the news has played out in the market? Yeah. So the reason we wrote about this in our latest monthly stock market outlook is because I recently had a theory about how some news events were gonna move the market and that theory turned out to be completely wrong. And what was that theory, Sam?

So we've all seen the headlines about the violence in the Middle East over the last few months. The war between Israel and Hamas has become such a humanitarian catastrophe that it has started to draw in other groups in the region too. Right, of course. In the last few months, the Houthis, who are a rebel group based in Yemen, have started attacking civilian ships in the Red Sea, basically in an effort to blockade

Israel. Now, the Red Sea is one of the Middle East's most important waterways, and about 12% of the world's total oil supply passes through it. So I figured that closing off such an important oil shipping route would dramatically increase oil prices around the world. But? But it turns out that Brent Crude, which is the world's most widely followed oil price benchmark, has actually been trading lower for most of the three months since the ship attack started. It has actually only inched above its pre-November price very briefly on a couple of occasions. When I dug into this some more, it seemed like traders had very quickly determined that it just wasn't a big deal for these cargo ships and tanker ships to switch to an alternate

route that avoided the Red Sea. Goldman Sachs analysts predicted back in December that the Houthis would have a minimal impact on oil prices because they weren't hurting production. And that prediction has come true so far. So to summarize this long story, I saw these headlines about a disruption to the world's oil supply. And I figured less supply means prices go up. But it turned out that there were a lot of nuances that I wasn't seeing. And a lot of other investors had already incorporated those nuances into their trading decisions. So basically, my theory was very out of date. Is it safe to say, Sam, that news-based trading is a bit like predicting the weather? As in, you need a lot of expertise, information, and technology available at your fingertips in order to be even somewhat accurate. who did build successful news-based trading algorithms that outperform stock market benchmarks.

But the key word there is algorithms. News-based trading can be a viable strategy if you have a supercomputer and a lightning fast internet connection and a whole team of data scientists who can help you build a cutting edge AI trading system. Oh, okay, so no big deal. What if you don't have these

things? Then your chances of success are a lot lower. The research on news-based trading by regular people like us is a lot more stark. Like for example, there was a 2022 study by economists at MIT and Stanford that looked at how individual options traders performed after company earnings announcements, which, of course, are major market moving news events. They looked at more than 32,000 earnings announcements between 2010 and 2021. And they found that on average, traders lost between 5% and 14% per trade when they were trying to react to those announcements. And the researchers wrote about several of what they called wealth depleting behaviors, one of which was a tendency to quote, sluggishly respond to announcements. I love that term wealth depleting behavior. I feel like

my DoorDash habit counts as one of those. Yes. It seems like one of the big takeaways here is that by nature, individual people don't have the brainpower to use news to trade effectively. Basically, you have to be an algorithm to process the news fast enough to trade on it profitably. And by the way, those algorithms, they're not some kind of experimental future technology. AI trading systems are out there on the market today, and they're actually managing huge volumes of money. You can even invest in AI-powered ETFs. Sam, since news shifts so fast and so often, is news always priced into the stock market accurately? That's a great question, and the answer is not necessarily. The existence of things like stock market bubbles, for example, is proof that the

market sometimes gets things wrong and that market prices don't always reflect the fundamental values of stocks. And when the market is wrong, individual investors do have an opportunity to beat it, but generally using other non-news based strategies. Okay. Well, what are some of those strategies? Well, for example, value investing is a strategy that is focused on buying and holding undervalued stocks. Those are companies whose shares are trading at nonsensically low prices relative to their earnings or their sales or other fundamental metrics because they've got a bad reputation or they've got a bad reputation, or they've gotten some bad news recently.

Okay, so just to make sure that I'm following, that's another example of the market getting things wrong, isn't it? Like undervalued stocks are priced too low because investors overreacted to bad news about them. Exactly. Value investors find those kinds of stocks by looking for companies with low

price to earnings ratios or low price to sales ratios. And for listeners who are not steeped in the world of investing, a price to earnings ratio and a price to sales ratio, those are just ways that people can compare the price of a stock to the performance of a company. Right. So how does growth investing or dividend investing fit in here? So those are also good alternatives to news-based trading. Growth investors also seek out companies that the market has underestimated in a certain sense, but their methodology is quite different. Rather than looking for run-down stocks the way value investors do, they look for stocks whose earnings or revenue is growing faster than the market average. And dividend investors use an even simpler strategy to try to beat the market. They just look for dividend stocks

that in addition to going up like other stocks do, also generate a little bit of income over time, and that can pad their returns. Are there any caveats that listeners should know about those strategies? For sure. The frustrating thing about investing is that there is no silver bullet strategy that's always going to beat the market. Growth and value and dividend investing all go through periods where they outperform or underperform the market. Like right now, in the last year, growth funds have been beating the market. But in five years, value funds might be killing it instead.

And we wouldn't be nerdwalled if we didn't remind listeners that investors who try to time the market regularly underperform, meaning that those who buy and hold usually do better with their investments over the long term. That they do. Thanks for coming on the podcast, Sam. My pleasure. That's it for this week's Money News. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast

at nerdballot.com. And remember to follow, rate, and review us wherever you're getting this podcast. Today's episode was produced by Tess Bigland and edited by Rick VanderKnecht. Sarah Brink mixed our audio. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.