As the market becomes further and further detached from both the economy and reality, when does the ‘priced in’ excuse no longer carry weight?
It is a versatile term bandied around by many financial commentators to justify the market’s seemingly illogical behavior in recent weeks, but is the term ‘priced in’ being used as a bandaid for the hemorrhaging economy, or is the market actually on its way to a v-shaped recovery?
What does being priced in actually mean?
For something to be priced in, it essentially means that the current price of the equity or asset class already takes into account and reflects the impact of the future event. So for example, at the start of the pandemic when people began to work from home, Zoom’s (NASDAQ:ZM) share price shot up before any new user figures were announced on the assumption that its product was now in hot demand. They were right and shareholders were rewarded with substantial gains, and herein lies the crux of the matter.
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In the stock market, those who react the fastest are usually rewarded. This means that once the actual news, announcement, or figures of a market-moving event are officially released, the market has already reflected it in its prices. If you have ever heard the term, ‘buy the rumor, sell the news’ this is what it’s referring to. In looking for an overworked cliche to describe our current market conditions, you could do a lot worse. It goes a long way to explaining why in times of such dire economic headlines, we see the stock market return one of its best weeks in history. It also explains why such a damning screenshot of Jim Cramer’s Mad Money can exist.
Of course, there is the argument that the stock market should not be taken as a barometer for the economy, and the reward for being the first-mover will often lead to a disparity between the two. Whether this argument is enough to bridge the current gulf between the two may be a bit of a stretch in my eyes. The party line is that all of the economic fallout we are bombarded with has been priced in by that rip-roaring month from February 20th to March 23rd where we saw the fastest bear-market in history occur and the Dow (NYSEARCA:DIA) and S&P 500 (NYSEARCA:VOO) both fall more than 30%.
- Record unemployment figures? Priced in.
- Factory shutdowns? Priced in.
- Airlines needing a government bailout? Priced in.
- Dramatic drops in consumer confidence and manufacturing numbers? Priced in.
It seems like those 32 days were the penance Wall Street had to pay before they could return to the good ol’ days of astronomical P/E ratios and soaring meme-stocks, when Tesla (NASDAQ:TSLA), Virgin Galactic (NYSE: SPCE) and Beyond Meat (NYSE:BYND) ran free. Looking at the performance of this triumvirate of hype since March 23rd, up 68%, 54%, and 29% respectively, it seems they’ve shirked off the effects of the global pandemic, which have of course been priced in, and are back to their version of normality.
Are we on the road to recovery?
It begs the question, when will these events no longer be priced in? What level of crippling economic circumstance must we reach before the market returns to reality and begins to mirror the economy once again? In the same week that saw Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) reach 52-week highs and Apple (NASDAQ:AAPL) announce a new iPhone, retail and manufacturing figures displayed a complete collapse.
As an investor, you must start asking yourself the question, was that 32-day blip on the radar all the market needed to steady itself as it looks down the barrel of a recession rivaling that of the Great Depression? A day will come soon where the words ‘priced in’ will no longer mean anything and ‘the bottom’ many people think we saw on the 23rd of March will be a distant memory. Perhaps this earnings season will be the catalyst, perhaps something else. If I knew the cause and when it would happen I wouldn’t be here writing articles for you lovely people, but I do know that a 32-day dip is not the last of what we’ll see from the big-C.
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