It’s all about expectations

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Published: March 7,2010

Tags: column, Olympics, Scott Reed

I heard someone say recently that we had just too much Olympics. Every two years is just too much. I couldn’t disagree more. I love watching those that are the best in sports, but are not usually covered by the sports media, compete for something other than a paycheck or endorsement money.  I was disappointed when the United States decided to let professional athletes compete in the games because I love the “for the love of the game” attitude of the non-professional competitors.

I was watching the “Today Show” recently when Meredith, Matt, and Al were interviewing two athletes from different sports.  Both athletes had won silver medals.  In the first interview, Meredith said something to the effect of, “You must be so proud.  What a great accomplishment.  How do you think you were able to pull off such a great run?”  The athlete talked about how all his training had paid off and how the long, hard years of sacrifice had come down to one moment that had made those years of hard training worth it.  It was a great story and I was very happy for him.

Then Matt interviewed the second athlete.  Their conversation was much different.  I’m paraphrasing but his conversation went something like, “Well, I know you were disappointed in the outcome.  Everybody thought you had this one. What happened? What went wrong?” The athlete went on to explain what had happened that had cost him the gold medal. He said it was tough because all the hard work and sacrifice over the past four years had failed to pay off.

Two athletes with the same results but very different stories and different reactions.  Each had certain expectations going into the games and those expectations created different reactions to the same results. The financial markets are very much the same. The markets are extremely efficient. As soon as news is released of any interest to investors, they, as a group, immediately react to that information. That reaction takes into account what is reported and extrapolates the effect of that news into the future. So, if a company is supposed to underperform yet comes up with better than average results, the price of that stock should rise significantly.  If a company is supposed to be great and only comes up with slightly better than average results, then its stock should go down significantly.

That is why we have seen the stock market rise so significantly in the past year.  Our future expectations for the stock market were discounted by such a huge amount based on our economic outlook that any good news would create a big run up in the price of the equity markets.  That is also why it is dangerous to answer the most asked question of the year, “Where are we going from here?”

It depends considerably on what you mean.  “Where is the economy going from here?” is a much different question than, “Where is the stock market going from here?”  When forecasters say that it is going to be a long road back to recovery, most of the time they are talking about the economy.  Even though we have seen significant improvement in the economic indicators over the past few quarters, we still have high unemployment and have yet to see real growth versus growth based on cost-cutting measures.  I think it will be a while before we see real, positive long-term trends that we can hang our economic hat on.  However, we don’t have to see real, long-term positive trends in the economic indicators in order to see sustained growth in the equity markets.  All we need is to see better than expected trends.  And, as long as the financial world is pessimistic about the future, we are likely to see better than expected growth in the equity markets.  And, the more confidence we have in the equity markets, the more confidence we will gain in the economy.  It is all related.

It is important to remember that our expectations can change at any time.  Future expectations are a fickle thing.  But, I for one am positive about the next five years in the stock market.  I am also positive about our economic future.  Just remember, the stock market and our economy are more like first cousins than identical twins.  They are related, but they don’t have to do everything just alike.

Scott Reed, CIMA, AIFA, is CEO of Hardy Reed Capital Advisors in Tupelo.

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