Markets Don’t Wait for Good News
3min video
History shows that markets incorporate expectations ahead of the economic reports. So, let’s examine why stocks don’t always wait for good news.
Video Transcript:
The stock market is constantly processing new info: pricing in expectations for companies and the economy. And because it looks so far into the future, it often will turn around before economic data does. Simply put, stock prices reflect future expectations, not so much what’s happening now or in the past. Therefore, investors who look beyond after-the-fact headlines and stick to a plan may be better positioned for long-term success.
Please look at these few charts from Michael Cembalest from JPM, where he explored this relationship between markets and economic news in a research note published on Oct. 19th. So there is a lot here, so I’ll leave this up for a while. Each chart is a bear market, but to keep it simple, let’s first look at the chart in the upper left. Stock prices are reflected in the S&P 500 as the blue dotted line tends to move upwards before we see improvements in earnings (in the red line) or GDP (in the yellow line), and employment (in the purple line). So zooming back out to the rest of the sample size here, you can see a general trend, with the market bottoming before any other data. On the bottom right, we are looking at the latest bear market. Now, it's possible that stocks could fall below the October lows.
But the key takeaway is: don’t be surprised to see stock prices move upwards, even as more bad news comes across your screen. The bad news is actually good news, as this would indicate that the Fed’s actions are working to cool inflation. So, quite literally, the market tends to get better as the economy gets worse.
I hope this can provide some context to the daily bad news we all get bombarded with. Stay the course and stay on point.
