Sometimes, trading is all about anticipation. New information quickly gets reflected in financial-market prices.
Photo: johannes eisele/Agence France-Presse/Getty ImagesWhat do investors mean when they use the phrase “It’s priced in”? They’re talking about the way investors’ expectations move financial markets.
“It’s Wall Street’s fancy way of saying ‘anticipated,’ ” says Adam Johnson, founder and author of the Bullseye Brief financial newsletter. He gives the hypothetical example of a 14-year-old taking the family car for a drive without permission. “If you take a joy ride in your parents’ car at that age you will anticipate, or price in, the disappointment from your parents when you walk back in the front door,” he says.
In financial markets, anticipation is a driving force. Investors look at likely future events to adjust how much they are willing to pay for stocks or other assets. “If you anticipate bad news next week, then you sell the stock this week,” Mr. Johnson says. And if investors anticipate good news, many buy.
In general, new information quickly gets reflected in financial-market prices, giving us a sense of what investors as a whole are thinking about the future for business and the economy. But of course that sentiment can reverse quickly as new information becomes available.
During the Covid-19 panic, investors quickly priced in an extremely weak economy for the immediate future. From Feb. 19 through March 23, the S&P 500 index fell 34%. That didn’t mean that the economy had already collapsed, just that investors were expecting a dire situation ahead.
But stocks then began a rebound that would see the S&P 500 halve its losses over the next two weeks, as investors priced in a less severe economic downturn, thanks largely to fresh support from the Federal Reserve. March 23 was the day the Fed said it would extend its bond-buying program, lower interest rates and take other measures to ensure that banks had access to liquidity.
Now, with share prices still volatile but well above the March low, the question is whether investors have accurately priced in the economy’s prospects or will shift their expectations again as new information emerges—and how those expectations will drive the markets.
Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.
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