The Market Is Smarter Than You

“The real lesson of the recent action is that sometimes the stock market sees something that eludes the rest of us.” –Michael Hiltzik


The stock market had a significant rally last Friday on awful unemployment news. Covid-19 forced 6.3 million workers to file unemployment claims last week. The virus has wiped out 17 million jobs in the U.S. over the last three weeks. So what gives?

The answer lies in understanding how markets really work.

The markets don’t care what you think or what you feel. The markets are emotionless. They are essentially giant information processing machines. They factor in all known and knowable information to come up with efficient security prices.

The markets are forward looking. The markets have already factored in what has happened and what is currently happening. The markets don’t like uncertainty. In this regard, they are very much like the rest of us. It’s hard enough to process all information to come up with efficient pricing and uncertainty makes this even harder. In our current situation, the biggest uncertainty is how long will this pandemic last. This uncertainty is the major reason for the huge market swings we’ve experienced over the last month.

Now back to last Friday. The market was already anticipating bad unemployment numbers. It was already baked into current pricing. It confirmed what the market was anticipating. Things are bad. In a weird way, this removed a level of uncertainty. With Congress and the Federal Reserve all in to get us through this crisis, the market took the unemployment numbers as a positive that more aggressive stimulus will be coming if necessary.

The stock market in aggregate is smarter than any individual investor. The market incorporates the wisdom of all market participates. It sees and anticipates things that investors on their own can’t. That’s why it is virtually impossible to outperform the market on any consistent basis.

Michael Hiltzik had a good column in the L.A. Times last week, that I think you will enjoy, Why Did The Stock Market Rally On Awful Unemployment News