Fear and greed are the driving forces behind day-to-day market movements. When one day’s change is a 500-point leap in the Dow Jones Industrial Average and the next day sustains a drop of a similar amount, you have to ask yourself: “What’s wrong with this picture?”
What’s wrong with this picture is the reality that short-term price action is almost exclusively driven by ongoing shifts between optimism and pessimism. One day, the media will point to hopes for more moderate interest rate increases as the basis for improved economic expectations. Then, a day later, Wall Street oracles will tack in the other direction, maintaining the likelihood that rate hikes will be more aggressive.
The impact of media pronouncements becomes even greater when analysts adjust their estimates of corporate profitability, which is the real reason why stock prices move higher over time. The initial estimates are usually toward the upper end of what’s possible. They are then refined (lowered) as actual numbers replace the guesswork.
Minor revisions usually pass with little notice. Big changes, however, can lead to big price corrections. Netflix, Zoom Communications, and Snap are excellent recent examples of how significant developments can undermine the market value of company shares.
Even so, based on data for the leading market indices over the many decades that have passed, no more than one-third of the interim changes reflects gains or losses in underlying profitability of the companies involved. Twice as much results from swings in how investors view what’s ahead.
What’s especially interesting is the wide range of opinions that are regularly offered by those reputed to be in the know. These pronouncements must be viewed with amusement since there are always “weighty” thoughts on both sides.
One seer will tell us when a correction or bear market bottom has passed. Another will assure us that the worst is still ahead. Depend on neither.
Focus on the climate, not the weather.
N. Russell Wayne, CFP®
Sound Asset Management Inc.
Weston, CT 06883
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