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Trading the News

There’s no shortage of financial news, to say nothing of the reaction to it. But how should you trade in response to such information?

Let’s look at the four most common types of “news” moving the markets today and how you could position your trades to ride the ripple effects.

1. Corporate earnings

  • The release: Quarterly earnings reports can trigger some of the most volatile—and potentially profitable—periods for trading a company’s stock. The key here is usually how the numbers compare with analysts’ expectations. However, many companies appear to be conservative in their estimates ahead of their releases, which can often lead them to exceed expectations. In fact, in the first quarter of 2021, 86% of S&P 500® Index companies reported better-than-expected earnings, according to the financial research firm FactSet.
  • The response: Consider waiting to trade on earnings until after the company-hosted call, during which officials may talk about the underlying health of the business, revise their outlook for future earnings, or reveal other data not made available in the earnings release. For example, when social media giant Twitter posted better-than-expected first quarter earnings in April 2021, its stock still plunged more than 15% after its forward-looking guidance fell short of expectations (see “Sudden drop,” below).

2. Economic data

  • The release: U.S. government agencies periodically report various data on the health of the economy. Generally speaking, the most tradable are:
     
    • Weekly initial jobless claims
    • Monthly Consumer Price Index data
    • Monthly retail sales figures
    • Monthly jobs report
    • Quarterly gross domestic product estimates
       
  • The response: Again, be mindful of expectations when trading in response to economic data. Many news sites report economists’ consensus outlook ahead of time, and the market will often move—at least initially—based on whether the numbers are better or worse than the median estimates. However, sentiment can change once investors have had a chance to dig into the details, so beware of trading on the data too soon.
     

3. Fed announcements

  • The release: Tracking the Federal Reserve and the direction of monetary policy isn’t just about trading on rate hikes or cuts. While those decisions—made by the Fed’s rate-setting Federal Open Market Committee (FOMC)—are important, they are often widely telegraphed by Fed officials ahead of time. What’s most influential is the FOMC’s forecast for interest rates and other policies moving forward.
  • The response: Traders should keep an eye on the statement that accompanies the Fed’s rate decision after each of its eight scheduled meetings every year; even slight changes in wording from meeting to meeting can lead to significant market moves. Similarly, changes to the Fed’s dot plot—which represents the view of each voting member for the federal funds rate target range—can influence stock prices. Traders also should look for changes in tone when Fed Chair Jerome Powell holds a press conference after each FOMC meeting. Following the June 2021 meeting, for example, stocks fell after Powell said Fed officials were “talking about talking about” tapering—a reference to a potential slowdown in the pace of the central bank’s monthly bond purchases since the pandemic began.
     

4. Federal fiscal policy changes

  • The release: Unscheduled policy announcements can have a dramatic impact on stock prices. Unfortunately, by the time actual legislation is approved—if it’s approved at all—it’s usually already baked into valuations. The Biden administration’s $2 trillion infrastructure proposal, for example, helped boost industrials in the first half of 2021, but subsequent compromises reduced the scope of the proposal—and with it, investor enthusiasm for the sector.
  • The response: Those looking to capitalize on potential policy shifts should heed the adage, “Buy the rumor, sell the news.” That is, consider entering a trade around the time the policy is announced—when expectations are often at their peak—and exiting before that blue-sky proposal is inevitably brought down to earth.
     

General rules of the road

In addition to the tips above, it can be helpful to try the following tactics:

  1. Narrow your time horizon: In most cases, you’ll want to get in and out of trades within a few days or even a few hours, lest other price-moving developments derail your original thesis.
  2. Protect your downside: Whenever you take on a new position, consider entering a stop or stop-limit order that indicates how far you’re willing to let a stock slip before you sell. While these risk-management tools won’t protect you from after-hours or premarket moves, they can help mitigate the damage if a trade moves against you during the day.
  3. Limit your exposure: Many traders restrict their shorter-term trading positions to no more than 20% of their total portfolio—with no more than 5% wrapped up in any one trade.
  4. Go broad: Consider exchange-traded funds, which grant you access to large or small swaths of the market; in some cases, they’ll even allow you to short parts of the market if you expect bad news.

And remember: Letting a little time elapse after news breaks can bring clarity—and even a complete reversal in an individual stock or the broader market—so don’t jump the gun if you aren’t feeling confident in your reading of the latest news.

What You Can Do Next

Read the latest insights from Schwab’s trading experts.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. For more information on indexes please see schwab.com/indexdefinitions.

All corporate names are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

The policy analysis provided by Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Investing involves risk, including loss of principal.

There is no guarantee that execution of a stop order will be at or near the stop price.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

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