The stock market is a discounting mechanism, which means its price reflects expectations for the future, and its price fluctuations reflect the market’s attempt to factor in changes to those expectations.
Believe it or not, in a given moment, the stock market does not care too much about the present state of things. That’s because expectations for the present will have been priced into the market days, weeks, and months in the past.
That is to say, the stock market reacts to news to the degree the new information 1) is not in line with what the market expected for the present, and 2) changes what the market expects for the future.
There are some more factors that drive stock prices over time. But in the context of digesting major news headlines, these are the two relationships to watch.
Because the stock market is so heavily dependent on expectations for the future, we inevitably get moments when stock market behavior appears to conflict with information about the present. Specifically, we sometimes get stock prices falling amid good news and rising amid bad news.
These are some of the most misunderstood moments in stock market cycles.
But we continued to get disastrous economic reports for weeks as the stock market rallied.
This resulted in one of the defining screengrabs of the pandemic. It was from the April 9 episode of “Mad Money with Jim Cramer.” Cramer’s show highlighted how the stock market had its best week in decades while the chyron reported the cumulative three-week tally of unemployment insurance claims ballooned to 16 million.
People were confused.
Many on social media did not take kindly to the stock market’s rally in early 2020. (Source: @JustinAHorwitz)
Yes, the economy was in bad shape in April. But expectations were already extremely low, which meant the bar for developments that could cause stocks to go higher was also very low.
In retrospect, it seems the stock market got it right.
The stock market, for its part, recovered all of its pandemic losses and reached new record highs in August 2020. (So, if you had dumped stocks as the news was getting bad and you had waited for good news to get back in, then you might’ve actually missed out on considerable gains you could’ve earned by just holding through the crisis.)
This was not just a pandemic recession phenomenon. The stock market usually begins its recovery long before the economy. JPMorgan’s Michael Cembalest reviewed the history in an October 2022 research note.
“There is a remarkable consistency to the patterns shown below: equities tend to bottom several months (at least) before the rest of the victims of a recession,” he wrote.
As you can see in Cembalest’s charts, stock prices (dotted blue line) tend to inflect upwards before we see improvements in earnings (red line), GDP (yellow line), and employment (purple line).
Stocks usually recover before the economy. (Source: JPMorgan)
While we might not necessarily be heading for recession, we could be in the midst of a “growth scare,” which has historically come with big stock market sell-offs followed by rapid rallies.
Growth scare-y anecdotes have been accumulating recently. Since the beginning of March:
Delta Airlines warned that their “outlook has been impacted by the recent reduction in consumer and corporate confidence caused by increased macro uncertainty.“
According to the NFIB’s February Small Business Optimism survey, capital spending plans tumbled to their lowest level since 2020.
From the NY Fed’s February Survey of Consumer Expectations: “Households expressed more pessimism about their year-ahead financial situations in February, while unemployment, delinquency, and credit access expectations deteriorated notably.“
From the University of Michigan’s March Survey of Consumers: “Consumer sentiment slid another 11% this month, with declines seen consistently across all groups by age, education, income, wealth, political affiliations, and geographic regions. …expectations for the future deteriorated across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions, and stock markets.“
Even President Trump euphemistically warned that Americans could face “some disturbance” and a “period of transition” as his administration moves forward with costly tariffs. Treasury Secretary Bessent echoed the sentiment, warning of an economic “detox period.”
Because the stock market is a discounting mechanism, you could argue that the current drawdown that began on Feb. 19 was the market pricing in the bad news we’re getting now.
This again speaks to the quandary investors face as they think about making adjustments to their portfolios. The stock market does not price in what’s going on today. It’s pricing in what’s expected in the weeks, months, and years ahead.
And that future is uncertain. It could be worse than what we currently expect. It could be better.
No one can say for sure that the stock market hit its low for the year. However, we also shouldn’t be surprised if we soon experience a sustained rally as incoming news just confirm gloomy expectations that have already been priced into the market.
Zooming out 🔭
In hindsight, divergences in the stock market and the economy make sense. But in the moment, it often feels wrong.
What feels right is when the stock market falls as you get information that indicates the present and near future are deteriorating, and vice versa.
However, there is likely to be a moment where the stock market moves higher as it resumes pricing in a better future. And that moment is likely to happen when the economic headlines are bad.
Why is it so treacherous to time market tops? Below is an excerpt from the July 9, 2024, TKer:
…Unfortunately, timing market tops is hard.
Sure, you may not have to pinpoint the exact top and subsequent bottom to improve your returns.
But you have to come pretty darn close.
BofA’s Savita Subramanian recently examined this question in a June note to clients (emphasis added):
Q: Is it better to sell early or late?
A: Neither. Remaining invested is generally superior to emotional selling. With perfect foresight, selling 1 to 3 months early would have protected investors as gains sacrificed were lower than losses over the subsequent 1 to 3 months. But the tradeoff neutralized at 6-months and skewed positive at 12m holding periods…
The window to trade market tops is narrow. (Source: BofA)
Keep in mind that if you are a long-term investor, timing the market comes with not one, but two trades. You have to sell what you believe is the top, and then you also have to know under what conditions you would buy back in…
There were several notable data points and macroeconomic developments since our last review:
👎 Consumer vibes tumble. From the University of Michigan’s March Surveys of Consumers: “Consumer sentiment slid another 11% this month, with declines seen consistently across all groups by age, education, income, wealth, political affiliations, and geographic regions. Sentiment has now fallen for three consecutive months and is currently down 22% from December 2024. While current economic conditions were little changed, expectations for the future deteriorated across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions, and stock markets.“
👎 Small business optimism falls. From the NFIB’s February Small Business Optimism Index report: “Uncertainty is high and rising on Main Street, and for many reasons. How future developments are resolved will shape the economy’s future. Confidence that the economy will continue to grow is fading.”
👍 Inflation cools. The Consumer Price Index (CPI) in February was up 2.8% from a year ago, down from the 3% rate in January. Adjusted for food and energy prices, core CPI was up 3.1%, down from the prior month’s 3.3% level.
👎 Inflation expectations deteriorate but remain cool. From the New York Fed’s February Survey of Consumer Expectations: “Median inflation expectations increased by 0.1 percentage point at the one-year horizon, to 3.1%, and were unchanged at the three-year and five-year horizons (both at 3.0%) in February. … Median inflation uncertainty — or the uncertainty expressed regarding future inflation outcomes — increased at all three horizons.”
⛽️ Gas prices tick lower. From AAA: “Despite increased demand, gas prices dipped lower this week, with today’s national average at $3.07 per gallon, about 3 cents lower than a week ago. This drop at the pump comes as many travelers gear up to hit the road for spring break and drivers may be surprised to find gas under $3 in 31 states.”
💳 Card spending data is holding up. From JPMorgan: “As of 07 Mar 2025, our Chase Consumer Card spending data (unadjusted) was 2.6% above the same day last year. Based on the Chase Consumer Card data through 07 Mar 2025, our estimate of the US Census February control measure of retail sales m/m is 0.20%.”
(Source: JPMorgan)
From BofA: “Total BAC card spending per HH was up 0.3% m/m in Feb. We forecast 0.0% & 0.2% for ex-auto & core control retail sales. Travel-related spending has been weak in the BAC card data this year. This is consistent with flat y/y airport traffic. We find evidence suggesting that DOGE cuts are weighing on spending in the DC area. However, the impact is localized for now.“
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage increased to 6.65% from 6.63% last week. From Freddie Mac: “Despite volatility in the markets, the 30-year fixed-rate mortgage remained essentially flat from last week. Mortgage rates continue to be relatively low versus the last few months, and homebuyers have responded. Purchase applications are up 5% as compared to a year ago. The combination of modestly lower mortgage rates and improving inventory is a positive sign for homebuyers in this critical spring homebuying season.”
💼 Unemployment claims tick lower. Initial claims for unemployment benefits declined to 220,000 during the week ending March 8, down from 222,000 the week prior. This metric continues to be at levels historically associated with economic growth.
Federal layoffs brought by the Trump administration’s Department of Government Efficiency appear making their way into the data. Initial claims filed by federal employees came in at 1,580 in the week ending March 1.
During the period, there were 6.85 million unemployed people — meaning there were 1.1 job openings per unemployed person. This continues to be one of the more obvious signs of excess demand for labor. However, this metric has returned to prepandemic levels.
👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.63 million people in January. While challenging for all those affected, this figure represents just 1% of total employment. This metric remains at prepandemic levels.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — has been trending lower, which could be a sign of trouble to come in the labor market.
🤔 People are quitting less. In January, 3.27 million workers quit their jobs. This represents 21% of the workforce. While the rate ticked up last month, it continues to trend below prepandemic levels.
A low quits rate could mean a number of things: more people are satisfied with their job; workers have fewer outside job opportunities; wage growth is cooling; productivity will improve as fewer people are entering new unfamiliar roles.
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 63.4% on Tuesday last week, down six tenths of a point from the previous week. Philadelphia hit a post-pandemic record high of 53.6% on Tuesday, up nearly a full point from the previous week. The average low was on Friday at 36.4%, up 1.2 points from last week.”
Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Think long term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
I distinctly remember considering dabbling in some market timing during the early Covid days of 2020. I remember watching the market continue to trade around ATH into mid-February of 2020, while I had been convinced for at least 2 weeks that the pandemic would not be contained to China and would eventually spread globally. I was constantly second guessing myself: "What has already been priced in?" "Do people really not expect this to be a major event?" "Am I getting bad information?" "Am I just overreacting because I'm more concerned about this than others?"
I ended up concluding that I was, in fact, overreacting, and held through the (extremely short) crash/recovery cycle.
The market can often feel like it's gaslighting you if you correctly anticipate a major event. But it is more likely to humble you, because there's always something to worry about, and most things that might feel scary to you end up having very little effect on the market.
I distinctly remember considering dabbling in some market timing during the early Covid days of 2020. I remember watching the market continue to trade around ATH into mid-February of 2020, while I had been convinced for at least 2 weeks that the pandemic would not be contained to China and would eventually spread globally. I was constantly second guessing myself: "What has already been priced in?" "Do people really not expect this to be a major event?" "Am I getting bad information?" "Am I just overreacting because I'm more concerned about this than others?"
I ended up concluding that I was, in fact, overreacting, and held through the (extremely short) crash/recovery cycle.
The market can often feel like it's gaslighting you if you correctly anticipate a major event. But it is more likely to humble you, because there's always something to worry about, and most things that might feel scary to you end up having very little effect on the market.