Has the Market Been Overreacting Lately?

Let's face it: The market has been on a roller coaster ride lately. As earnings season draws to a close, you might be wondering how it is that so many companies reported great results, yet still saw share prices tumble. In this segment of Backstage Pass, recorded on Nov. 3, Fool contributors Trevor Jennewine, Rachel Warren, and Brian Withers discuss. 

Trevor Jennewine: There's another few comments from ProShopGuy. He mentioned, "Is this the new normal that when a company reports earnings, when they know they delivered some disappointing results, the stock drops double-digits afterwards?" That does seem to be happening a lot recently. Do you guys have any thoughts on that?

Rachel Warren: I have some thoughts on this. I think that's a great question. I think this is something we're going to be seeing more of, at least in the near future. I think on the one hand, I think some investors got very used to these above-average growth figures. Some of these major companies we're seeing during the work-from-home rash in the earlier days the pandemic. I think the market has been highly reactive lately. I understand. There's some concerns that are very real about inflation, labor shortage, supply chain crisis.

All of these issues are driving some concern among investors, but it is worth pointing out, you're seeing some companies, for example, a company that I'll talk about here in a little bit, Amazon, that had a shaky quarter, but again, great company with a super robust track record. No reason to think that it's going to be many quarters like that ahead. But the market reacted negatively. I think this might be the new normal in the near future, at least until some of these bumps in the road with supply chain and labor shortage even out. I think it's not a stretch of the imagination. I think that could continue at least a bit longer.

Brian Withers: Yeah. I know, Rachel. I've been investing in individual stocks since 2004 and having a stock move up 10% or down 10%, I totally remember that happening. I have no idea if the frequency now is more than it was in the past, but I feel like there's a lot of uncertainty in the market right now between the coronavirus, the delta variant going away, inflation, what's happening with supply chain stuff, and how is that going to affect companies.

Anytime you have uncertainty, and then companies perform outside of the band, either above it or below it, you will see big moves in the stock. But what's funny is, if you look over a longer period of time, maybe that 10% just gets washed out, I guess, a little bit. But it's a little crazy when one of your stocks [laughs] moves down 10% in a day, [laughs] especially if it's a big position.

Trevor Jennewine: Yeah, I think you guys hit the nail on the head. I think it also depends on the types of stocks you're investing in. I think high-growth companies are going to be more prone to that volatility. I think it's always easier to look at what's happening right now.

It's happening right now, so it feels worse. It feels like it maybe it's happening more frequently. Whether or not that's true, I think it could be the new normal for the near term, like Rachel said.

Then just taking on the other comments, we had in there, ProShopGuy mentioned that Meta would be one of the picks for the largest three companies 10-15 years down the road or a company that takes advantage of the new web infrastructure with a digital currency. I think those are both great ideas. And Prikash mentioned Tesla or its parent company in the top three.