We talked recently about the wall of worry being up, and doubters about the market extending to higher prices. This is quite common though when the market comes under duress as it did last month investor psychology gets rattled and risk aversion takes hold. We don't often see the crowd just jump back in especially during a crash event we have just witnessed.
Why be the first one in and try to catch a falling knife? I get that as it becomes a bloody affair. Yet, we have to remember that markets look forward and not behind. The economic news, the earnings reports, and current virus updates are likely embedded in current stock prices. How does that happen, you ask? The stock market is the great discounting mechanism, and for years has been a wonderful predictor of economic activity in the U.S.
Many are confused when the markets rise on bad news. Take the last three Thursday sessions in April. Those days were marked by the release of first time unemployment claims. Each day saw record filing levels. In total there have been more than 25 million first time claims, wiping out job growth over the last 10 years. That is off the charts. Those numbers are just staggering, yet the markets rallied sharply higher after those dismal numbers were released.
The market cares about what is to come and not what is currently happening. Perhaps the markets see this number getting better or just a temporary situation. Did the markets sniff out this bad economic data in advance? Probably so, with the equity markets falling about 33% in a month from late February to late March.
If you're worried about the current economic state of affairs, it's understandable. It's been nearly 90 years since the start of the Great Depression and some of the economic data is being compared to that period. There is nothing pretty about it, but with a sharp advance off the recent lows perhaps the stock market sees less bad down the road - for now.