Do not take this as any kind of prediction about what the stock market is going to do in the weeks to come. But last week there were some signs that investors are finally coming to terms with the true state of the economy, and that, in the jargon of the market, the bad news for companies is beginning to be priced into their stocks. The most obvious example of this came on Friday, when the market rose more than three per cent despite a horrendously bad jobs number. But that could very well have been just another example of this market’s crazy volatility. The more interesting, and perhaps telling, thing was that a number of major companies—including G.E. and Research in Motion—announced last week that they’d be falling short or coming in at the low end of Wall Street estimates, and instead of having their stocks be crushed, saw them stay roughly flat or even rise.
This was surprising: as I’ve mentioned before, the pattern all fall has been that no matter how awful things seemed to be, investors still reacted with shock and disappointment when companies gave them bad news. Last week, by contrast, they reacted with something like equanimity (granted, equanimity in this market means that stocks only rise and fall by five per cent rather than twenty per cent). This might suggest that in some cases, stock prices have fallen to the point that they’re anticipating truly grim profit numbers for the foreseeable future, so that bad news will no longer come as a surprise. That grimness of outlook is, of course, a perversely a good thing: it’s only when investors are seeing the world as it is (or will be) that the stock market can work the way it’s supposed to.
– James Surowiecki, “Has The Stock Market Started to Price in the Bad News?”, The Balance Sheet, Monday December 8
For a time over the last couple of weeks, however, the market has teasingly hinted of an ability to quit going down, or even to rally, on continued lousy economic headlines of the sort that are all but certain to continue for many news cycles.
Consumer confidence and spending figures that sent headline writers to the thesaurus for synonyms for “plunge,” a raft of large-company earnings warnings and layoff announcements, yet more congressional theatrics involving auto CEOs-through all of it the market has fitfully churned above its recent lows.
– Michael Santoli, “The Quicksilver Quandary” (subscription required), Barron’s, Saturday December 6
Especially encouraging to me was the action Friday. Stocks sold off Thursday afternoon in anticipation of a bad Jobs Report. The number came in worse than expected Friday morning and stocks sold off in the morning. But they reversed course intraday and ended with a powerful rally. After being down more than 200 points, the Dow finished up 250 and the S&P 31.
Think about that: stocks were up big on a day in which the headline news was the worst Jobs Report in 34 years. That is very bullish market action and strongly suggests to me that at these levels stocks have now priced in a severe recession.
– Greg Feirman, Top Gun FP Client Note: When Stocks Go Up On Bad News, Sunday December 7