Making a list. Checking it twice. Gonna find out what’s priced in or not.
With stocks trading at record highs, I’d argue that nothing is as important as what “news” is priced in–or not. If stocks have priced in all the likely good news, then there’s much less to drive prices higher–and much more expansive possibilities for drops on disappointments. If there’s likely good news that’s not yet priced in, then stocks have potential fuel to move high.
And, on the other hand, if bad news is priced in and fails to materialize, then, hey, we’re going higher from here. And if bad news isn’t priced in, then current record prices aren’t sustainable.
Do remember, however, that investors and traders have the ability to look past news–good or bad–for longer than we might expect. With the current market so convinced that we’re going to rally through year end, I wouldn’t be surprised to see stocks ignore good or bad potential news until January or February.
My list:
Good news that’s priced in:
A drop in inflation as the current 6.2% annual rate does indeed prove transitory, as the Federal Reserve hopes.
Near record profit margins remain at current levels as energy costs fall and global supply chain chaos resolves
The Federal Reserve stays on its promised glide path with no interest rate increases until the end of 2022 or later
Good news that isn’t priced in:
China’s economy grows more strongly than expected
The bad news that isn’t priced in:
Inflation, driven by rising labor costs, doesn’t fall rapidly in 2022
A new wave of Covid infections this winter (exactly what we’re seeing in Europe now) leads to new restrictions on business operations and travel
Supply chains remain snarled as China keeps its “Zero infections” policy in place ahead of the Beijing winter Olympics.
The Federal Reserve wakes up to possibility that it has blown the inflation fight and decides to crack down with higher interest rates.
Profit margins fall as companies get squeezed by rising costs.
With the removal of Pandemic stimulus, the U.S. economy slows and consumers get more negative on spending.
You can undoubtedly add to the list.
By my count, the odds are stacked against stocks in 2022. No reason not to profit, if you can, from the end of the year market melt up.
Just don’t fall in love with it.
