Market Overview

Wednesday's Market Minute: What's Priced In?

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Wednesday's Market Minute: What's Priced In?

When stocks are down a lot, you think about which bad possible outcomes are assumed to be happening and reflected in the stock price. When stocks are up a lot, vice versa.

Judging by the fact stocks have yet to sell off meaningfully since the March 23 bottom, here are some things we know that were priced in during the sell-off: soaring unemployment to the tune of 20-30 million job losses, complete crude oil price collapse, double-digit quarterly earnings declines, and a reopening process for the American economy that has barely begun and doesn't look to be in the cards for major cities like New York City until, at absolute earliest, May 15.

The problem is, you don't know if something's priced in until that event occurs, and you gauge the reaction of the market to it. If the event should be a bad thing, but stocks don't go down, you assume it was priced in. If it should be a good thing, vice versa. Assuming you know what's priced in before the events is, of course, mostly guesswork.

The exception is that when stocks are on very extremely low/high valuations by historical standards, it may be reasonable to assume more bad/good things are priced in. At the most expensive valuation since the dot-com bust, that reasoning right now points to a lot of good things being priced in. But so far, not many good things have actually happened, apart from an enormous amount of government policy that looks to have staved off the worst-case scenario.

While many see the stock rally as literally incredible, it should tell us that relief from bad things that were priced in on the way down is driving the action. That means momentum is still on the side of stocks, and while there aren't many obviously great possibilities on the near-term horizon, that may not be necessary.