Years ago, a large fund family sent out an advertisement showing a young boy at a table in front of a plate of peas. He was clearly unhappy with his meal given the expression on his face. The caption read, “This is what buying low feels like.” That ad is so true. When things are bad, it’s hard to get excited about buying stocks, even if doing so might be good for you.
Profiting from owning stocks requires a basic understanding of how markets work. One of the more confusing aspects is the often-illogical movement of the markets. The trick is to understand that the stock market is designed as a predictor of future value, not a statement of current value. Investors buy stocks because they expect them to go up in price (including dividends). They want their investment to grow. So, they are looking down the road anticipating where things might be. In other words, todays’ stock prices reflect how investors feel the markets may be 6-12 months from now, or further. It is a forward-looking number.
Imagine that you have a hike planned but you hear there is a chance of rain. You will gather your coat, boots and umbrella and toss them in the trunk of the car. Now you are ready for the rain. If it comes it won’t ruin your hike because you have already planned for it, but if it ends up not raining then that will be a pleasant surprise.
If markets believe interest rates and inflation numbers will keep getting worse, todays stock prices will reflect those assumptions. In market terms we say that the market has already “Priced-in” the bad news. If it happens, it was already accounted for in todays’ stock prices. It already expected rain and was ready for it. If investors begin to believe that in a few months the aforementioned problems will begin to ease, then stock prices would be expected to rise today even if it’s still raining. Stock prices don’t wait for a sunny day, they anticipate it.
So, the market becomes less a reflection of today’s realities and more a predictor of future conditions. Despite the current challenging economic conditions, this week the market had some strong upward days. Pricing on Wall Street was driven not by the current economic rains but by the anticipation that some are seeing more sun in the future. It is in misunderstanding this issue that I see many investors making mistakes. They invest, based on today’s news rather than tomorrow’s potential. This often leads them to selling and buying at the worst times, after good or bad news has already been “priced-in.” What they should be doing is looking 6-12 months down the road and invest based on what they expect.
Todays’ markets have priced-in rain.If it continues, we already have our market umbrellas in the trunk. In deciding to buy or sell, what investors today should focus on is what they believe the economic weather will look like beyond the spring of next year.
Dan Wyson, CFP® is author of “The Gold Egg,” and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor.
*Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.
