Buy the Rumor Sell the News
By the time all the data confirming an economic recovery comes in, most of the easy profits have been made.
The indicators have been pointing to a stronger economy for some time, and the market has moved up accordingly. Depending on which index one uses, U.S. equity markets have gained more than 60% since March 2009. While earnings improved during the second and third quarters of 2009, much of that improvement got its gusto from cost-cutting, not from any meaningful revenue increase. Although company management comments were markedly better during the third quarter than the second quarter, they were still far from glowing. But hope springs eternal, and despite the hesitant tone, the market continued to plow ahead.
Now with the tendrils of fourth-quarter results emerging, I am beginning to see more positive revenue surprises, more bullish comments from management teams, and an economic recovery that has now become a foregone conclusion. So, what happened in the face of this good news?
Based on the S&P 500 Index, the market managed to decline just over 1% for the week ending Jan. 15. This is just another reminder that the market is a highly anticipatory device. By the time all the data confirming an economic recovery was in, especially from corporate sources, most of the easy profits had been made.
Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.