If you watch CNBC, Bloomberg or Fox Business and read any of the hundreds of financial publications printed every day you’ve likely heard an onslaught of investors who say “the bad news is priced in”. This makes sense at first glance. We’ve been in a recession for a year, investors are well aware of the current environment, etc, etc. It’s logical to think that the bad news is all “priced in” after so many months of falling stock prices, however, the truth tells a different story. Today we saw a 573K increase in jobless claims. Analysts and the general Wall Street consensus was for 525K. Are you telling me that 525K was “priced in”?
The problem with analyzing a market as large and complex as the U.S. is that it moves very slowly. I like to think of the stock market cycle as a snake that swallows a deer. Human beings are accustomed to a swift consumption and digestive process. You eat in 30 minutes, your body breaks down the food in a few hours and the result is deposited in the Hudson River in no time. A snake, however, can take days to consume and digest a large animal. Much like the U.S. economy, the process is drawn out – it can take years or decades to finish one completepeak to trough market cycle. But the market is made up of millions of impatient participants. We want the snake to consume and digest the food as quickly as we do, but that’s simply not how it works. The inherent short-term outlook of human beings is what makes economies so difficult to comprehend.
The snake, in our case, is taking a long time to digest the massive levels of debt that was fed to it over the 90’s and the early years of this century. The result is a long unwind of trillions of dollars of excess. Investors want the market to just deposit it all out in the Hudson tomorrow, but the system isn’t finished working its magic yet.
A simple example will show you how the pundits are still ahead of themselves. A few days ago Fedex reported its earnings early. The weakness in every one of Fedex’s business segments is known to be weak and has been for over a year, but how weak? Well, analsts expected Fedex to earn roughly $4.75-$5.25, but the company came out and said they would earn $3.50-$4.75 – substantially worse than expected. No, it was not priced in as the stock got hammered over the next two days. Analysts still expect the S&P 500 to earn $70 this year and $79 next year. In my opinion, these expectations are still too high and it will likely get reflected this earnings season when corporations relentlessly cut their guidance and force the market to “price in” lower future earnings.