Transcripts

How Wall Street Works - How News Affects the Markets

PAUL KANGAS: Besides earnings, other factors can also send a stock's price up or down. One of these is something we cover every night on NBR: the state of the overall market. As Erika Miller reports, a bit of news or even a rumor about politics, the economy or interest rates can make the entire market turn hot or cold.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: September 11, 2001- - a date that America will never forget, marking the commission of the worst acts of terrorism in U.S. history. The attacks on the World Trade Center literally hit too close to home for Wall Street and the financial markets, which never opened that day. But when the exchanges reopened six days later, stock prices plunged across the board, with the Dow Jones Industrial Average dropping 684 points, more than 7 percent. It was the biggest one-day point loss ever. By the end of the week, the index had fallen 14 percent. Veteran market watcher Jim Awad says the sell off was due in large part to worries about the economy.

JIM AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: They were afraid that the whole U.S. economy would seize up and shut down because of fear of terrorism, that people wouldn't go to malls and that if people weren't going to malls, they wouldn't spend money and if consumers weren't spending money, then businesses wouldn't spend money and they wouldn't hire people.

MILLER: But it doesn't take news as momentous as a terrorist act to move stock prices. These days, almost anything -- including an economic indicator, an earnings report, even a rumor -- can affect the mood of the entire market. But on the other hand, the stock market often discounts important developments. Sometimes, if news has been well circulated, it can have very little impact on stocks. Here's a common example. If the outcome of a presidential election is widely anticipated, there is frequently little reaction in the stock market the day after Election Day. And as trader Tom Thurston points out, stocks typically move more on the rumors of a corporate merger than on the actual announcement.

THOMAS THURSTON, HEAD OF TRADING, SANDLER O'NEILL: By on the rumor, sell on the news. If that rumor has been looked into and people are able to think there's some credibility to it, then when the news hits, they unwind the trade.

MILLER: Investors should also understand that certain companies have influence well beyond their own stocks. For example, as a leading retailer on the Internet, any news from amazon.com is widely regarded as a gauge of what is happening in terms of web sales generally. Similarly, a good sales report from General Motors can reverberate across the entire auto sector and even the entire market. The challenge for investors has always been to separate the noise from the news, but it's even tougher today. There's more information available and less time to analyze it. Erika Miller, NIGHTLY BUSINESS REPORT, New York.