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Robert Burgess

The Efficient Market Hypothesis Takes a Beating

An overreaction in stocks leads market commentary. 

Something doesn’t add up.

Something doesn’t add up.

Photographer: Dean Mouhtaropoulos/Getty Images

Some of the smartest people in the world work on Wall Street, but that doesn’t mean that markets can’t “overshoot.” In other words, the economy is never really as good nor bad as markets suggest, and right now they are sending a pretty dire message. But there’s good reason to think that markets have perhaps tilted too far to the downside after the S&P 500 Index fell almost 2 percent Monday to its lowest since April only to snap back to end little changed.

On a day when there was no shortage of research notes calculating the odds of a recession over the next 12 months, some influential firms went out on a limb to say such mental gymnastics are premature. JPMorgan said the correction in U.S. stocks have “overpriced” risk of a recession, while Goldman Sachs said a rare divergence has opened up between the market’s performance and economic data, according to Bloomberg News’s Lu Wang. The Institute for Supply Management said last week that both its manufacturing and services indexes remained at levels that correlate to strong economic growth. On Monday, a government report showed that the job-openings rate for the durable-goods manufacturing industry reached 4 percent in October, a record in data back to 2000. There are reasons beyond the economic data that should give bulls hope, according to DataTrek Research. For one, the Federal Reserve is sounding less hawkish, suggesting it will not keep hiking interest rates blindly until some notion of “neutral” has been reached. Also, the big drop in Treasury yields over the last month should help support equity valuations. Plus, the dollar has stopped appreciating and has largely moved sideways in the past month, which should help exporters; 37 percent of S&P 500 revenues come from non-U.S. sources.