The Price is Wrong

It’s commonplace to hear on any business channel or CNBC that the market has priced something in.  You’ve all heard this a lot lately with market analysts talking about interest rates rising and the upcoming election. So how does this market palm reading work?

Well, it’s kind of like playing The Price is Right. “The market” looks at everything going on in the world and prematurely tells us how much our stocks will be worth based on what it thinks is going to happen. Much like a contestant would put a price on a car without knowing if there is even an engine under the hood. (If they find out there’s no engine that price may drop a bit)

Market pricing is based on the Efficient Market Hypothesis which states that stuff that the market thinks is likely to happen is already built into the price. So, if something happens other than what the market expects, this is where we can see some price disruption.  This year has provided two perfect examples of this behavior with Brexit and the upcoming election.

Focusing on the election, we’ve heard that the markets have Hillary priced in to win multiple times from many sources. Now, this may cause gnashing of teeth and calling of bologna, but this past week proved this assertion. Since the FBI announced that they would be reopening their investigation into the Clinton Foundation e-mails the S&P 500 is down almost 2%.

The S&P isn’t playing favorites here, or pulling some swoon in lament of the ridiculousness that has engulfed our current election. This move simply shows that the market thought Hillary was going to win and the recent headlines make what it thought was going to happen less likely, so it adjusted its outlook.

Markets love to jump the gun on decisions and hate any type of uncertainty.  So, when you see these types of movements as an apparent result to news, have confidence to see them for what they are, something the market didn’t expect. Often they have little or nothing to do with the long term effects these events will have on the market or economy.