Has the Market Gone Haywire?

Years ago, my dad told me that the reason he didn’t invest in the stock market was that he didn’t understand how a company’s stock could plummet on the day they announced record sales and profits. Contrarian swings like to ones my dad referred to make it seem like the market ebbs and flows without any reason whatsoever.Recently, stocks have been jumping up when the jobs report says that millions of more people have filed for unemployment. So, what gives? Why does the market react positively to negative news and vice versa?It has taken me many years to figure out why the market does what it does. Spoiler alert—it is part logic, it is part fear, its part greed, and it is part chaos. To see this in action, I have chosen to walk you through the movement of Disney’s stock since January 2019.As you can see above, I highlighted all the positive happenings in green and all the negative in red. On its surface, the stock price seems to go up and down independent from the type of news being released. The reason it seems illogical is that people expect the market will react to news the day it becomes official, but the truth is that the market has already priced in a better (or worse) scenario into the current price by the time announcements are made official. So, on the day news is announced, the stock adjusts only to the difference in scenarios.In Disney’s case, the stock market priced in a substantial subscriber base to Disney+ when the cost of the service was announced in April 2019—that’s when the stock increased by over 25% within a month. Then, when the service went live in November 2019, there were over 10 million subscribers on the first day, which meant that Disney’s projections of getting 60 million subscribers by 2024 were going to be an understatement. Disney’s stock reacted with another 7% increase over the next few weeks because the market was seeing a better scenario than what was priced into the stock back in April 2019.This month, Disney hit 50 million Disney+ subscribers (way ahead of the 2024 projection), but the stock didn’t move much because of the unknown impact of Coronavirus on Disney’s theme park revenue that is currently being priced into the stock. A year from now, if the theme park revenue is better than the current projections and the subscriber base continues to be strong, then the stock will likely increase significantly. Otherwise, you might see some flatlining or moderate declines.So, here’s how you should see Disney’s movements over the past 16 months. Disney’s upward movement on Disney+ subscribership projections in April 2019 is logical. Disney’s upward movement on Disney+ subscribership in November 2019 is part logic and part greed. Disney’s precipitous drop in March 2020 is part fear, part chaos, and part logic.The moral of the story is that you will be disappointed if you expect the market to be 100% logical. Happy investing!