Financial markets often behave quite differently from what a rational person might expect. They fall on good news and rise on bad. It really can sometimes seem like investing through the looking glass

Take the current debate over quantitative easing. When Ben Bernanke appeared before Congress in May and made the unexceptional remark that the extraordinary monetary stimulus of recent years could not continue indefinitely, investors were spooked.

The reaction was understandable in one way because the liquidity provided by the Fed has largely been diverted into riskier assets like company shares and this has provided a significant support to global stock markets.

Looked at another way, however, the reaction was less rational because the reason for the “tapering” of stimulus is fundamentally a positive one. The Fed will in time stop pumping money into the US economy because it will no longer need supporting.

Now the interesting point for investors going forward is that the Fed has made clear that its decisions on future monetary policy will be taken with one eye on economic data releases. If the economy recovers more quickly, it will accelerate the withdrawal of funds; if it starts to flag, stimulus could well be started again.

What that means is that good news on the economy could end up being bad news for investors. The recovery might be better but the liquidity taps will be shut off. Equally bad news for the economy could be a bonus for investors.

QE is an unusual state of affairs so it might be expected to have a contrary impact on markets. It is interesting to note, however, that the looking glass effect works in all market conditions when it comes to investing in bonds.

Here bad news is always good and good news bad. That’s because good news is associated with rising interest rates and bad news with falling rates. And because the price of a bond moves in the opposite direction to its income yield, a rising cost of borrowing flows through directly into lower bond prices while a fall in the cost of money equals higher bond prices.

There’s a third way in which market prices can surprise people who are unfamiliar with the topsy-turvy world of investment. It’s a facet of investment that is best summarised by the old adage “it’s better to travel than to arrive”.

What this means is that sometimes prices move in anticipation of an event so that when it finally happens the pendulum immediately swings back the other way. Good news is greeted by a fall in price and bad news sees a bounce.

Rather than worry about the headlines – which can blindside even the most experienced investor – it is far better to focus on your long-term goals and invest throughout the news-cycle. Alice would have understood.

Tom Stevenson is investment director at Fidelity