A Market By Any Other Name

The stock market has been making a lot of headlines recently—mostly bad. So, here is what is going on. The efficient market hypothesis is a financial principle that states that share prices of stocks reflect all known information—past, present, and foreseeable future. The problem with this concept is that there are so many unknowns that the market isn’t 100% efficient, but only generally. An example of the efficient market hypothesis happened a couple of months ago—the Fed chair was giving a speech. Before he started, the stock market was up by 1%, but during his speech, the market dropped 2%, then he said something else which caused the market to be more optimistic, which resulted in a 2% jump, and then he said some more bad news which dropped the market by 2%. Right now, market investors are trying to assess the impact of inflation on corporate earnings, the possibility of a recession, and the impact of many international issues on the economy. When there is a lot of unknown information, investors tend to be pessimistic—planning on a worst-case scenario. That is where we are right now—millions of investors are planning on a worst-case scenario negatively impacting stock values. I think that the market is overreacting to the possibility of a deep recession akin to 2008-2012. As with many investors, I believe that the Fed and government are inept at managing our country’s financial system; however, I don’t think we will see a deep recession as we did in 2008-2012. My current strategy is to identify strong companies that the market has temporarily punished. An example is FedEx—they recently released news saying demand is weakening and thinks their earnings will be negatively impacted. On this news, the stock dropped by 25%. Then, a week later, they released their earnings report, which was 50% higher than analysts expected—the stock only went up by 2% that day. I’m seeing similar stories all over the market right now—the market is disconnected from corporate earnings. While that means your stock statements will look bad in the short run, it also means that there are buy opportunities regularly presenting themselves. The best thing you can do right now is to keep a cool head—that is the best way to avoid market losses. Happy investing! Ü