Date posted: December 15, 2010
Many people watch the stock and other investment markets for clues to what might happen to the economy. “Baked-in results” is a term increasingly heard. N.C. Cooperative Extension economist Mike Walden explains how investments can be “baked-in.”
“It’s actually a fairly simple idea. If you are an investor — and of course an investment market is simply a collection of all investors — you are going to be forward looking. You are going to try to anticipate what various events might do to your investments, your investment returns. And so, for example, if there is a widely anticipated future change that is going to affect your investment markets, then you are going to go ahead and find those changes already baked-in — that is, already impacting prices today even before the change happens.
“A real good example of this … is the announcement by the Federal Reserve a couple of weeks ago that they were essentially going to print $600 billion more of money and inject that into the economy. Well, the investment markets knew that was coming; they actually liked this, and so we saw a big increase in the stock market and stock prices even before this process had begun because, again, the investors are expecting this to occur, so they have already baked-in the impact of that on stock prices.”
Category: Economic Perspective