Frequently people equate the economy’s health with the health of the securities markets, but they are often not in sync. While the two are closely intertwined, they usually do not move in lock step.
The securities markets reflects the anticipation of the future. Market participants are estimating/judging/projecting where the economy is going in both an aggregate and company by company basis. A rising market reflects this sentiment in higher securities price levels.
Take the securities markets recent tailing off from the record highs. The market has been anticipating a better economy for a long time. Now the economy is producing pretty strong numbers, but the market is pulling back just when you might think that “everything is coming together”. One major factor could very well be that the anticipation was excessive and now it has to adjust to reality.
Let’s equate this to a vacation. For weeks, you anticipate the time off. At the beginning of your vacation, you are absolutely ecstatic about the vacation. As you go through your vacation, you begin to find that the anticipation was highest just before the vacation started. This phenomena has been closely studied. You would think it would be highest during the vacation, but that just isn’t the case!
The securities market experiences these “vacation reality checks” just as individuals do. Some refer to it as the market “getting its head out in front of its skis”.
This is one of the reasons that a lot of good company revenue and earnings numbers result in the falling market prices. Only in the case when the revenue and earnings numbers are way higher than anticipated does the price rise.
Always remember that enthusiasm for any event is highest right before an event.
Next vacation you take, do your own personal research. There is nothing like first-hand experience.
