Expectations

This just in! The 3rd quarter Gross Domestic Product (GDP) figures have been released. It’s reported that the US economy grew by a staggering 33.1%, the best quarter ever on record! Let’s begin by setting the record straight though. The US didn’t gain over 1/3 of its productivity in three months—the figure is stated as an annualized rate and predicts what would occur if the change from the previous quarter was sustained for an entire year. Nonetheless, the figures were still impressive, but were actually just slightly better than most economists expected. You may have wondered, why didn’t this shoot the market up and how can stocks continue to go up if there’s still bad news in the world?

Stock prices indicate what investors feel a company is worth. There are several factors in this determination. The current earnings of a company are an important consideration, but investors also try to quantify the future growth potential of that company as well. In other words, a major component of a stock’s price is the expectation of future dividends, growth and profits. Investors and analysts are constantly trying to predict future growth and those predictions are reflected in current stock prices. When news is different from expectations, stocks experience price swings – up or down. 

There have been fairly large swings in the stock market again recently. Several companies have temporarily halted trying to guess their short-term future earnings. This has left analysts flying blind with no guidance from the companies in order to form their predications. The big price swing occurs when the company reports their earnings and the result is compared to the nearly blind expectation.

In a world that seems to be inundated with bad news and scary headlines, many stocks saw price increases for several months because their earnings were beating expectations. Analysts have struggled to make correct predictions during the Covid-19 pandemic and many of their forecasts have been overly pessimistic. As silly as it sounds, when the news is bad, as long as it’s less bad than expected, a stock’s price will likely go up. 

A finance professor in my MBA program shared his secret to happiness. He would tell us, “I always try to have low expectations when I go somewhere or do something for the first time. That way, I’m almost always pleasantly surprised by my experiences.”  As we prepare to finish out this year, we hope the economy, markets and people’s quality of life will continue to improve. 

~ Mike Razzouk

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing involves risk including loss of principal.

No strategy assures success or protects against loss.  The economic forecasts set forth in this newsletter may not develop as predicted and there can be no guarantee that strategies promoted will be successful.