Markets Are Smart Even When They Seem To Panic
The S&P 500 recently dropped 9 percent in a single week thanks to fears of a global trade war. On April 3 and 4, it was down 11 percent following President Donald Trump announcing his “Liberation Day” tariffs. Only days later, it surged 9.5 percent in one day after Trump announced he would pause many of the tariffs.
With this level of volatility, one might be led to believe that the markets are an inefficient tool that serves no economic purpose. But the stock market has, in fact, been doing a fairly good job of discounting the effects of a global trade war into corporate earnings.
If you add up all the corporate earnings for every S&P 500 company and assign a multiple to it, you get a rough estimate of what these companies are worth. In good times, the multiple will expand: We are willing to pay more for a dollar of earnings. In bad times, the multiple will contract: We are willing to pay less, and the market is saying that earnings are going to go down. These adjustments usually take place over a period of months or years. Now they are taking place in a matter of minutes. On April 9, when Trump announced that tariffs would be paused, the stock market gapped higher. It simply repriced.
Algorithmic trading has made markets more efficient. But occasionally, that efficiency breaks down.
Last week the
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