On November 20, 2013, JPMorgan Chase & Co. (JPM) agreed to pay a $13 billion settlement to the U.S. government as a consequence of its role in sub-prime mortgage lending that led up to the financial crisis of 2008. Essentially, JPM made poor quality mortgage loans to borrowers and then sold those mortgages to investors at an overstated value. Combine this settlement, which the U.S. government called the largest in its history, with the reputational hit to the company, and you might think this would have a punishing effect on the JPM stock price, right?
Not so – the stock price actually rose on the day of the announcement! And since then, it’s outperformed the S&P 500 by about one percent. The question
as to why is certainly a fair one.
The answer is because stocks don’t move simply on good or bad news – they move on how news, good or bad, compares to market expectations of that news. Market participants are constantly assessing publicly traded companies and reflecting their expectations for the company in the buying and selling of the stock. These expectations incorporate every possible variable impacting the company (economy, regulatory environment, sales growth, earnings forecasts, hiring or layoff updates, etc.).
On an ongoing basis, these expectations for the company are either being realized or revised. If a company reports a positive surprise (better than expected news), the stock price will likely increase. If the company reports a negative surprise (worse than expected news), the stock price will likely decrease. This is why companies enjoying record profits can actually experience a decline in stock price – if analysts were forecasting profits to be even slightly stronger than realized, the reported news will be a disappointment to the stock’s price. It’s the news relative to the expectations that moves the stock price.
In the case of the $13 billion fine imposed on JPM, the figure was negotiated with the U.S. government for months. Information was provided real-time to investors and was priced into JPM’s stock price all along the way. In the days leading up to the announcement of the $13 billion settlement, analysts were forecasting that exact number, which is why the stock didn’t plummet (or skyrocket) dramatically.
A company’s good news can be good or bad news for the stock’s price, and the same holds true for bad news. It is how that news compares to the market’s forecast that really makes the stock price move. Today’s market prices already reflect expectations for tomorrow’s economic and geopolitical conditions, and these expectations can change quickly in response to new information. And since new information is by definition unknowable, no one can consistently predict the future direction of the market or any given individual stock (which is only affirmed by the many who try!).