Markets correct through price or time
Stocks were under heavy pressure early Monday and the story is both complicated and simple — investors fear the Fed waited too long to begin cutting rates.
But the violent moves we’re seeing in markets to what wasn’t a great, but also not terrible, jobs report force us to turn our attention to the dynamics of the market itself rather than additional news about the economy, earnings, and so on.
Which recalls to us one of our favorite market adages: markets correct through price or time.
Meaning that when the price of any asset — a stock, bond, etc. — becomes divorced from its fundamental drivers, the price of that asset will find equilibrium by either falling in price or going nowhere while fundamentals catch up.
With fears rippling through markets that the Fed is no longer cutting rates for the right reason (inflation is at its 2% target), but for the wrong reason (the economy is tipping into a downturn), investors are choosing the former option.
The current earnings season is on track to show profits in the second quarter rose at the fastest annual pace in nearly three years. Recent market action suggests investors think expectations for future profits are simply too high.
And rather than wait to see if stocks trading at current prices can “grow into” these valuations, investors are selling first and asking questions later.