Is the bad news priced in?
Today the Fed released its Beige Book (which literally has a beige cover, thus the name.) This report, released eight times a year, gathers anecdotal information on current economic conditions by each of the twelve Federal Reserve Banks (there are also 24 branches). The data comes from Bank and Branch directors and interviews with key business leaders, economists, market experts, and others. It is subjective but insightful. The stock market pays attention to it as it may provide clues as to how the Federal Reserve may move when it comes to their economic interventions.
Today the Beige book highlighted business concerns with inflation, supply and labor shortages. It said that businesses experiencing increases in costs were likely to pass them on to consumers (fueling more inflation). It also documented a slowdown in economic activity, largely due to a pullback in entertainment related activities due to the Delta variant of Covid (which was seen in the August job report which came in well below what was expected). Overall, it was not good news. So did the market drop dramatically? No, but it continued its three day swoon. Begs the question of why the reaction was not more pronounced.
Most market participants are suggesting that the market was relatively steady as it had already priced in the bad news. That is the impact of inflation and shortages are already incorporated in the market and that the prices of stocks reflect that. The logic is, that while these concerns are problematic, they have been common knowledge for so long the market has already discounted these worries. But no one really knows if that is in fact the case. `If companies begin to make negative pre-announcements about their upcoming earnings, as Pulte Group (home builder) and two paint companies did today, will the market ignore this very tangible data? I doubt it. A steady onslaught of bad pre-announcements are very likely to spook the market. And a spooked market can trigger a nasty decline. Talking about trends in the abstract is not the same as seeing real time results. Reality trumps theory every time. The market does not “know all”.
Market today: Another down day. Closed more calls than puts but did not buy any stock. Need a much bigger decline to trigger stock purchases. I had one speculative stock of mine fall 10% today - closed a call on it but did not buy more. I did not like the decline but still think its a good stock. If it falls another 5%, however, I will sell it. I am also toying with NFLX, which is becoming a buzzy stock. That is a stock that is mentioned a lot by traders, has a lot of buy recommendations and analyst upgrades and many people simply seem to be buying. NFLX is in fashion and fashionable stocks often make great option plays.