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It's All About Expectations

It's All About Expectations

March 17, 2017

Stocks have experienced strong gains in the last few months.  We now have a better understanding why.

In a press conference yesterday, Federal Reserve Chairwoman Janet Yellen shared these thoughts: "the simple message is the economy's doing well," and "we have confidence in the robustness of the economy and its resilience to shocks."  This helps to explain at least some of the reason why stocks have gained ground recently.  Every day, on average, over 82 million trades in the global stock market occur, representing over $346 billion (!) in value.  Buyers and sellers transact based on everything they know about stocks, the economy, interest rates, as well as what they expect will happen in the future.  When we receive new information that exceeds our expectations, stocks prices rise to reflect this new consensus.  And, of course, when that information fails to meet expectations, prices often decline.  In the last few months, we've been pleasantly surprised with better-than-expected economic growth.

Prices aren't always right, but they're fair.  They are the consensus of what all of us know and expect.  The likelihood that anyone of us, individual or professional, with only a small fraction of the available information, can consistently outguess the "wisdom of the crowd" is remote.  This is a very different message from the one propagated by the financial media and Wall Street pundits, who would prefer you to believe that markets are fickle, irrational, and prone to regular and predictable errors.  Of course, if you're trying to sell newspaper subscriptions or investment products, this is a convenient view of the world -- it keeps your readers and customers on edge, waiting for your "wisdom" about what will come next (while never reminding them about how previous forecasts have turned out).  If, on the other hand, you trust markets and your long-term investment plan is rooted in common sense principles like broad diversification, the ubiquitous link between investment risk and return, low costs (fees and taxes), and the importance of discipline, you'll see the wisdom of ignoring this short-term noise, which is usually just a distraction from the effort of working towards and achieving your most cherished financial goals.

If your current investment plan is predicated on predictions and short-term maneuvers, or you know someone who is stuck in this selection-and-timing purgatory, don't hesitate to contact us or introduce them to us.  As investors, the more we know, the better we do.


This content is intended for informational purposes only and should not be construed as an offer or solicitation of any particular security, strategy, or service.