Thinking ahead: Why investors focus on the future

It can be surprising to see the share market rise during a period of bad news or fall after a seemingly positive update. But there is a rationale behind this.

Financial markets are forward-thinking. Rather than responding only to what’s happening right now, investors make decisions based on what they expect will happen next. These expectations, about the economy, business performance or global events, play a major role in shaping market behaviour.

That’s why the market often reflect future outlooks more than current headlines. Understanding this helps explain why the market doesn’t always align with what’s happening in the news.

Here’s what you need to know.

Markets move on what they think comes next

At any moment, the share market represents a consensus view. It’s the combined outlook of thousands of investors trying to guess what comes next: Will inflation keep rising? Will consumers start spending it again? Is that tech company about to take off or tumble?

Share prices reflect those expectations. When investors are feeling optimistic about the future, prices tend to rise, even if the present looks a bit gloomy. And when they’re feeling nervous, prices might fall, even if the latest data looks fine on paper

A helpful analogy: the dog and its owner

ADP Research’s chief economist Nela Richardson compares the economy and the sharemarket to a dog and its owner on a walk:

“The economy sets the route and keeps things moving, but the stock market might stop to sniff something or run ahead to chase a squirrel.”

In other words, the economy provides the direction, but markets often leap ahead – or hang back – based on speculation, optimism or fear.

So why does bad news sometimes seem like good news?

It’s all about interpretation.

Take this example: if unemployment drops and wages rise, that’s good for households. But markets might worry that the Reserve Bank of New Zealand (RBNZ) will respond by lifting interest rates to cool things down. That can dampen investor enthusiasm, especially for companies that rely on borrowing.

On the flip side, if the economy slows down and inflation eases, markets might rally in anticipation of interest rate cuts – even though everyday consumers might not feel better yet.

This disconnect was seen in 2020, when New Zealand share prices bounced back quickly from the first COVID lockdowns, even though GDP was still deeply negative. Why? Because investors were already looking ahead to recovery.

Sentiment matters, even when the numbers don’t change

Investor sentiment can drive market movements just as much as hard data. If people believe a company has a bright future, they may invest – pushing prices up – even if the company hasn’t posted impressive earnings yet.

On the other hand, fear or uncertainty can cause prices to fall, even if the fundamentals haven’t changed. That’s why investing is both a rational and emotional exercise, and why short-term price changes can feel unpredictable.

What this mean for you as a long-term investor

The market is always changing but that doesn’t mean your investment strategy should. In fact, it’s a good reason to think long term and avoid making quick decisions based on short-term news.

It’s also an important reminder that you can’t time the market. Trying to guess the best moment to buy or sell often results in missed opportunities. Staying invested through the ups and downs is usually more effective than trying to jump in and out at just the right time.

Here’s why:

· Prices already reflect known information – By the time a headline hits, the market has often already responded.

· Volatility is normal – In a future-focused market, daily ups and downs are part of the journey.

· Returns are built over time – It’s a company’s long-term performance, not this week’s news, that drives investment success.

So, how should you respond?

It’s easy to feel nervous when the market isn’t doing what you expect. But understanding that markets are future-focused can help you stay grounded.

Here are a few key takeaways:

· Tune out the noise – Not every headline requires a change in strategy.

· Stick to your goals – Invest based on your life plans, not market predictions.

· Review periodically – Make sure your portfolio still aligns with your time horizon and risk comfort, particularly if you are reaching, or have reached, a significant life milestone.

Most importantly, if you’re unsure, talk to someone who can help you see the bigger picture: your Invest Link adviser.