Market Discounts Everything: What You Need to Know

Market discounts everything is a principle of Dow Theory that provides standing ground for technical analysis. The market discounts everything principle states that the current stock prices are already discounted for all future and past events. The principle accounts for events ranging from investors’ emotions to macroeconomic factors such as inflation. 

Market discounts everything is one of the six tenets of the Dow Theory. The other tenets say that the market has three trends, market trends have three phases, trends should be confirmed, a trend remains in force unless proven otherwise and volume should confirm a trend. Dow Theory is a technical analysis approach developed by Charles Dow, the founder of Dow Jones & Company, in the late 19th century. The theory is based on the analysis of market trends and is considered a precursor to modern-day technical analysis.

What Does “Market Discounts Everything” Mean?

“Market discounts everything” means that the current price of a security (such as a stock or bond) reflects all available information, including economic, financial, political, and other relevant factors that could impact the price of the security. Market Discounts everything is one of the six tenets of the Dow Theory, coined by Charles Dow.

It is important to note that there are some events that are unknowable, such as a massive earthquake or a terrorist attack. Such events cannot be predicted or incorporated into the current market price, and they are excluded from it.

The collective wisdom of all market participants, including investors, traders, and analysts, is reflected in the current market price. This means that it is difficult or impossible for an individual investor to gain an edge by analyzing the same information that is already incorporated in the price.

An example of “market discounts everything” from an Indian perspective can be seen in the stock prices of Reliance Industries Limited (RIL), a leading conglomerate in India. RIL’s stock price has been impacted by various factors such as changes in government policies, global economic conditions, and company-specific developments such as acquisitions and new product launches. All of these factors are reflected in the stock price of RIL, which is constantly adjusting to new information as it becomes available. Therefore, the concept of “market discounts everything” holds true for RIL’s stock price and for the Indian stock market as a whole.

How Does “Market Discounts Everything” Affects the Market Trend?

The market discounts everything principle affects the market trend by indicating that market trends are driven by new knowledge that the market has not yet fully assimilated. New information is reflected in the market price, causing market patterns to shift once it becomes accessible.

Traders and investors who comprehend this idea are able to use technical analysis to recognise trends and make intelligent investment decisions. Traders are able to alter their positions accordingly and capitalise on emerging opportunities by evaluating market patterns and spotting prospective changes in direction.

Let us look at an example to understand this better. Let’s say a company, ABC Corp, announces that they have developed a new technology that will significantly increase their production efficiency and reduce their costs. Investors become more optimistic about the company’s future earnings potential and start buying shares of ABC Corp as this news spreads.

The demand for ABC Corp’s stock increases, causing its price to rise as more and more investors buy shares. This upward trend in the stock’s price reflects the market’s assimilation of the new information about the company’s technology development.

The market may fully assimilate this information at some point, and investors may decide that the stock’s price has become too high relative to its earnings potential. They may start selling their shares, causing the stock price to decline as a result.

Traders who understand the market discounts everything principle may use technical analysis to identify these trends and adjust their positions accordingly. For example, traders may choose to sell their shares or short the stock in anticipation of a price decline if they recognize that the market has fully assimilated the news about ABC Corp’s technology development and that the stock’s price may be overvalued.

Why Does “Market Discounts Everything” Occur?

The “Market Discounts Everything” occurs because financial markets constantly digest new information about economic conditions, company performance, and other factors that might affect the value of assets such as stocks, bonds, currencies, and commodities.

Market players rapidly modify their expectations of the future value of these assets 

as new information becomes accessible. This influences their purchasing and selling decisions. Price discovery describes the process of incorporating new knowledge into asset values. A primary driver of the “Market Discounts Everything” idea is the market’s effectiveness in digesting new information and reflecting it in asset values.

Who Made the Term “Market Discounts Everything?”

The term “the market discounts everything” was coined by Charles Dow, the founder of the Wall Street Journal and co-founder of Dow Jones & Company. Dow believed that the stock market was an accurate barometer of overall economic conditions and that all known information about a stock – including its past performance, current financial situation, and future prospects – was already reflected in its current price. Dow added this principle to his famous Dow Theory, which has six other tenets. Dow theory and the principle are widely used by traders for technical analysis. 

The term “market discounts everything” is also related to  Efficient Market Hypothesis (EMH). The EMH-related term is attributed to Eugene Fama. Fama is an American economist and Nobel laureate who is widely recognized for his work on the Efficient Market Hypothesis (EMH). The EMH asserts that financial markets are “informationally efficient,” meaning that asset prices reflect all available information at any given time. Fama’s research on the EMH led him to conclude that it is difficult, if not impossible, to consistently outperform the market by actively trading securities.

How Does Technical Analysis Interpret “Market Discounts Everything?”

“Market discounts everything” is a fundamental concept in technical analysis. It means that the current price of a security reflects all available information, including economic factors, market sentiment, and company performance. Technical analysts use this principle to analyze price charts and identify trends and patterns that can help predict future price movements. They believe that past price behavior can provide insight into future price behavior, and that by studying charts and indicators, they can anticipate changes in market sentiment and adjust their trading strategies accordingly. It is important to note that technical analysis is not foolproof and should be used in conjunction with other forms of analysis.

What Does “Market Discounts Everything” Mean in Dow Theory?

“Market discounts everything” is a fundamental principle of Dow Theory, which is a technical analysis approach to trading in the stock market. The principle implies that the current price of a stock or security reflects all available information, including factors that may impact the price in the future.

Dow Theory states that the stock market is an efficient mechanism that processes all available information and reflects it in stock prices. Any new information, whether positive or negative, is quickly reflected in the stock price, and it is difficult to outperform the market consistently.

This principle has important implications for investors and traders. It suggests that attempting to predict future stock prices based on past performance or other factors is futile since the market has already taken all available information into account.

How Do the Investors Think About “Market Discounts Everything?”

Most investors agree with this concept, and it forms the basis of many investment strategies. But some investors may disagree with this principle, arguing that there can be inefficiencies in the market that lead to mispricings and potential investment opportunities. The majority of investors believe that the market is generally efficient and that attempting to outperform it consistently is challenging.

How Does it Affects the Inflation?

Market discounts everything theory is inclusive of all knowable factors, including inflation.

How Does it Affects the Interest Rates?

Market discounts everything theory is inclusive of all knowable factors, including interest rates.

What Does 20% Market Drops Mean?

A 20% market drop typically indicates the beginning of a bear market, which is a prolonged period of downward trending prices in the financial markets. This can be caused by various factors such as economic downturns, political instability, or global pandemics. Investors tend to be cautious and may sell off their holdings during a bear market, leading to further declines in prices. It’s important to note that bear markets can be unpredictable and difficult to time, making it important for investors to have a long-term investment strategy in place that accounts for market volatility.

What Do Market Discounts in the Future Mean?

Market discounts in the future refer to the way that financial markets incorporate expectations about future events into current prices. The market is predicting what will happen in the future based on available information, and adjusting prices accordingly. This means that the market will likely bid up the price of related stocks if there is positive news or expectations about a company or a sector. Prices will likely be discounted if there is negative news or expectations. Market discounts in the future are a way for investors to gauge market sentiment and make decisions based on expectations for the future.

Is “Market Discounts Everything” Came from the Dow Theory?

Yes, the concept of “market discounts everything” is one of the fundamental principles of the Dow Theory, which was developed by Charles Dow in the late 19th century. Dow Theory states that the market reflects all available information, including economic, financial, and political factors. Therefore, the current price of a security is the best estimate of its true value, and any new information will be quickly reflected in the price. This principle is still widely accepted by many investors and analysts today and is considered a cornerstone of technical analysis.

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.