Heard this one yet? British and American value stocks are set to surge as swift vaccine rollouts accelerate reopening. How could you not? This theory, or versions of it, gobsplatter financial airwaves everywhere. But acting on this forgets one key timeless lesson 2020’s stock market taught: the more headlines hype something, the more you know markets already weighed it—and moved on past it.
It’s routine. The more attention a story grabs, the more pundits call it a key “theme” or “risk.” What few fathom: If the story leads the news, everyone knows it. If everyone knows it, those inclined to buy or sell stocks on it already did. Always.
Folks forget: Markets are an auction—with billions of buyers, sellers and onlookers. Opinions shape what participants are willing to bid for shares. Those opinions aren’t formed in some vacuum. Headlines, forecasts and fears mold them. When a story is well known, when pundits have widely discussed it, it’s cud-chewed and done shaping sentiment. Its power over stocks? Spent.
Hence, novel surprises always move markets most. Recall 2020. Fourteen months ago most investors expected more gains. Economic growth looked set to persist for the foreseeable future. January stories of a Chinese coronavirus were largely ignored. Then COVID hit Europe. Governments shocked everyone by locking economies down. You know the rest, including world stocks’ all-time record-fast February to March fall from all-time highs to a bear market. Sentiment swung from optimism to deep despair nearly overnight.
Most pundits thought that sharp drop was only the beginning of ugly. Pundits invoked 1930s comparisons. Even back then, they warned a second autumn and winter virus wave would bring much worse for public health, not to mention economies and stocks/ .
The public health side of that came true, of course. You’re still living it. But the stock market warnings didn’t. The second wave was no surprise to markets. Stocks’ -33.8% plunge by March 23’s low was their way of pre-pricing a severe economic contraction and fears of worse to come. And, with that done, fully priced fast, the S&P 500 surged. That upturn started before any economic recovery signals or ebb in new virus cases. But stocks looked ahead to what was coming in the much farther future, as I’ve written here multiple times: reopening and recovery. From March 23 through October 29—when US Q3 GDP data confirmed growth had snapped back—stocks rose 49.5%. Markets had pre-priced growth.
This happens time after time. Recent examples? The second COVID wave and renewed lockdowns. America’s election chaos. Brexit. All widely watched—all pre-priced. Therefore, none could generate anywhere near enough negative shock to impale stocks. The same holds for vaccine developments now.
In mid-November, successful vaccine development news first flooded airwaves. Stocks jumped as pundits pontificated about which firms would “win” the development race. Sentiment warmed rapidly. Again, I’ve written on all this here before. Long-lagging value stocks—economically sensitive firms more reliant on reopening—rallied. From November 6 – 24, value outperformed growth 10.0% to -0.2%. Most pundits soon talked of value stocks leading for years.
But value’s edge faded in weeks. From November 24 through 2020’s close, growth outperformed value 6.3% to 2.1%. A January value bounce came and went fast. Now value is enjoying another brief burst. It probably won’t last either. The theory vaccines will cure value’s ills is too common.
Stocks have known all along vaccines were coming. Every developmental twist and turn, approval and deployment is widely watched and discussed by nearly everyone. Each time another group gets approved to receive the jab, the press is flooded with coverage ranging from sign-up troubles to long wait times to happy grandparents anxious to see family—and in every country.
Anything this widely known and watched must be pre-priced. Nearly everyone expects herd immunity to deliver torrid economic growth. Hence, the boost pundits see for economically sensitive value stocks. But rosy economic expectations for them are baked into stocks by now. To positively surprise, economic growth would have to top those expectations repeatedly. While a sharp initial bounce looks probable, a Roaring 2020s doesn’t look set to kick off. Much more likely: Another GDP growth surge that fades fast—just like last year’s reopening. Stocks will see that before it is widely known. The biggest beneficiaries will be the stodgy growth stocks everyone is sick of today.
You can apply this logic repeatedly in markets: By the time a big story grips headlines—whether good news or fearful—the story’s surprise power is spent. Beyond short-term sentiment swings, stocks won’t pay it much mind. Pundits did it for them.
That is the great, silent and free service pundits perform for you. They help efficient markets adapt to information and pre-price the probable future. They show you what everyone sees and sweats so you can seek something else.