Tempering Expectations

Investors are currently being pitched one of the most unique curveballs in history by the stock market, and many people, despite sticking to tried-and-true investing methods, have fallen for the ruse. Intuition dictates that buying low and selling high yields the best results—more specifically, buying when the general public is just beginning to show optimism, and sell when there is a hint of pessimism in the air. Admittedly, this procedure functions admirably when the market reacts to news and consumer sentiment in a manner that aligns with investor expectations. However, individuals who are sticking to their guns and holding fast to this standard principal of the inner workings of stocks are finding their attempts to time the market correctly destroyed at every turn, as fresh waves of good and bad news dash investors’ best attempts to triumph in these turbulent times. The fact of the matter is that the present stock market is extremely bipolar, showing no indication of direction and surprising investors at every turn.

The primary shock derives from national news, which, historically, has instigated the greatest stock motion. Traditionally, good news, such as a rise in profits, would increase optimism, while bad news, such as a rise in the unemployment rate, would consequently trigger a sell-off. Recently, however, news that can be clearly interpreted as good or bad has an ambiguous and indefinite impact upon the market. For example, news
of layoffs has customarily been a source of optimism, in that cutting employment costs allows a company to be more buoyant, and better positioned to prevail in the future. When gossip regarding a more extensive bailout plan was circulating last week, stocks floated upwards. This is significant, because the market generally reacts to action more often than suspicion. However, after Geithner’s speech outlining the next phase of plan, the Dow fell a whopping 5%. Furthermore, many stocks are at exceedingly low prices, the depths of which haven’t been plumbed for decades, and despite the bargain cost, nobody is willing to put their money at risk. Historically, dwindling prices have provided enormous buying opportunities, but now we find ourselves doubting such companies have any tangible value at all. This thought process has forced the shares of many large, once stable companies down below $1. The market reacts unpredictably to predictable news, and therefore the traditional mentality of market timing is meaningless.

Obviously there is no best solution to handle the current volatility, but one can and should make educated guesses, rather than predictions, at what overall investor sentiment reveals. One noticeable trend is that it does not matter significantly if a company’s profit falls by 50% in a quarter, as long as it exceeded the expectations of those who actually tried to make a prediction in these precarious times. If the business comes out ahead, in any amount, its stock tends to rally sharply. Thus, investors are avoiding any news more painful than they were expecting to hear. In this sense, investing for mid-term profit is merely a matter of tempering expectations.