How Market Expectations Mislead Investors
Raising a 5-year-old has taught me a lot about setting expectations. A few nights ago, I gave him a 5-minute warning before bedtime. When I told him it was time, he jokingly stood up straight, saluted me, said “yes sir” and marched upstairs to brush his teeth. I’ve learned this “warning” technique after many failed attempts that involved me interrupting him in the middle of a game to send him to bed with no warning. When I do this, he is completely caught off guard and his reaction shows. The time he goes to bed is the same in either scenario. The only difference is whether his expectations were met.
Let me try to convince you that the same is true in the short-run for the stock market.
After a horrible 2022, a lot of market pundits were talking about how the worst was still ahead of us. Still now, the threat of a recession is looming and corporate earnings are expected to continue to fall. While more bad news can and probably will come, that tells you very little about how the stock market will react. So far, many companies have missed earnings and guided down for the remainder of the year, but the stock market has mostly shaken it off, up 7% this year.
Facebook (META), a stock that was crushed in 2022, is up over 50% this year, including a 20+% jump the day after it published results that showed a 5% slowdown in revenue year-over-year. Why the jump after a drop in revenue? Expectations were so incredibly low for this company. The stock market punished META and other companies last year because there were expectations of large decreases in revenue and earnings. This year, sitting on very low expectations, investors are willing to reward companies that simply meet the low expectations that were set in 2022.
Could all this change? Yes, absolutely. Results could start to come in well below expectations and we could see the market reset. But for now, the drop in earnings that everyone in 2022 predicted has arrived, and the market has mostly brushed it off.
That is why trying to consistently time the market is an impossible endeavor. Knowing what will happen in the economy is not enough. You also have to know how investors will feel at any point in time because expectations matter more than fundamentals in the short run.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.