Sunday, March 8, 2020

The week the financial world changed - A repricing event

The classic approach to most forecasting is to create some extrapolation of existing data trends. There are many ways to extrapolate and model data, but all are based on some weighing of the recent past. Nevertheless, there are a few periods when there is a wholesale repricing of risk. The repricing event can be, for example, a financial crisis, a structural economic change, or a significant supply shock. We are at one of these repricing inflection points. 

Risk repricing wipes away the past and causes asset prices to move in a different direction from yesterday's environment. This repricing can be temporary, or it can be a large shift that lasts beyond days or weeks, but when it happens, past data cannot be extrapolated and is almost useless. The defining of rational expectations is when investors realize that the past is not helpful for predicting the future.

The COVID19 scare is now one of those repricing events. Labor markets or consumer confident from last month has no value. P/E has no value. Sales trends have no value. We are in a new world. All market behavior and investment decisions should be viewed through the filter of a repricing event.

1 comment:

Unknown said...

Yeah I agree about Covid-19.
During Covid period, repricing has reached to the top. The quantity of sellers have risen all over the charts.