Making sense of stock price movements is a challenge for all investors. Share price fluctuations often seem illogical…they go up when we think they should go down, and they go down when we think they should go up. Here’s why.
Capital markets are forward looking mechanisms, meaning at any given moment, they reflect a certain set of expectations for the future. From GDP, to Federal Reserve monetary policy, to corporate earnings, etc., market participants en masse set expectations for nearly every economic measure. Markets move when actual results deviate from these expectations. If results are better than expected, prices often move higher and vice versa.
The secret to making this work in your favor lies in recognizing that the absolute results don’t necessarily have to be good. The information just has to be better than feared or less bad than expected. On Wall Street, less bad is a synonym for good. This simple but impactful insight should be in every investor’s toolkit.
Presently, 4Q19 corporate earnings are expected to dip by -0.4% year-over-year, according to FactSet. This is not a robust performance by any measure. If, however, this expectation proves to be conservative and companies surpass that benchmark even modestly, 2019’s stock market rally will likely continue into 2020.