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Blog | What it means when the market ‘prices it in.’

Pierce Hanlen
Private Client Adviser
23 Mar 2022

Fundamentally, investing in shares is all about buying publicly traded shares in high-quality businesses that you believe have the ability to grow into an even greater, more profitable business in the future.

If markets were ‘efficient’ then companies would always trade at their fair and reasonable price, but that is not the case. The market prices in current and future economic circumstances to determine the current fair price of an investment. When I say ‘the market’, I am simply referring to all of the investors that are actively buying and selling investments.

While this is not intended to be a political post, let’s use the current global landscape to see how the market has been pricing in ongoing information as it is a real-time example of market volatility. Andrew Hewison and Nathan Lear recently wrote excellent blogs on the impact of rising interest rates in the US and what the Russian invasion of Ukraine means for investors. To summarise, since the start of the year investors were made aware of the US Federal Reserve’s intention to raise rates multiple times throughout the year to ease inflation, and we also received updates that there was a real possibility that Russia would invade Ukraine.

The following chart shows that since the start of the year the S&P 500 (the index for the 500 largest publicly-traded companies in the US) has decreased in value by around 12.4%. This is because the market felt that there were difficult times ahead, and as more information was received, the rockier everything became.

(Source: Google finance)

The most important piece of information here is that at the time of writing, the US is yet to actually raise interest rates and Russia didn’t actually invade Ukraine until the 24th of February. This demonstrates the impact of investors ‘pricing in’ information that they believe will impact businesses in the near future.

Trying to time markets, picking the best time to sell and the best time to buy, is made incredibly difficult due to markets pricing in information, because, for a period of time, it can be largely speculative. This is why we always stick to the fundamentals of buying and owning incredible businesses that are resilient to short-term market forces.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.