Investors follow the news in order to identify both economic drivers and corporate data so that they can make their financial decisions. However, stock markets can be tricky at certain occasions, especially when there is a high level of volatility led by uncertainty in the most important economies. As a result, market participants behave based on what the central banks are expected to do next instead of taking into account a firm or weak recovery of the economy.
The United States
The Federal Reserve’s commitment to purchase billions in mortgage-backed securities and treasury securities in order to, respectively, help many American families which still struggle to pay for their houses, and keep the interest rate near zero, has changed the market dynamics. In other words, at certain moments back in 2012, investors expected bad data to be reported regarding the business environment, so the Central Bank was unlikely to slow down in its asset purchasing program.
As a result of this nonsensical behavior, corporations are likely to withdraw when it comes to issuing new shares or selling debt to support their projects. Stock prices are led mostly by feelings and expectations regarding politics rather than portray the actual state of the economy. Speculators jump into seeking gains through volatility, whereas long-term investors rush to the sidelines to protect their savings. As the global economy still struggles to recover from the 2008 financial crisis in the United States and sovereign debt issues in Europe, instability in the stock markets keeps many economies from strengthening.
Brazil
Investors have already chosen one side: they are eager to support any candidate but the current president, Dilma Rousseff. Every time the polls indicate Mrs. Rousseff is losing territory, the market caps of state-owned companies increase substantially. Therefore, the market participants are willing to watch the diminution of the state oil company Petroleo Brasileiro SA- Petrobras (NYSE:PBR) today for a better future without political scandals and mismanagement regarding the use of the company as a tool to fight inflation.
Investing in Brazil is such a delicate issue for a simple reason: macroeconomics keep telling you that the Latin American country is likely to face a bitter combination of lower growth prospects and higher prices in the next years. On the other hand, as we have seen, the shares of Petrobras— which make up about 14% of the Brazilian benchmark Bovespa—are driven mostly by politics, it seems to be a huge opportunity cost for investors to not put their money into Petrobras.