November 2022 Investment Memo
This Time with Spirit: The Stock Market is not the Economy
The Stock Market is Not the Economy
When it comes to investing, the financial media, and by extension, our clients, always get the order of operations wrong.
Here’s the general and fearful observation.
Stocks are down —> The economic crisis will intensify → This will push stocks down further —> More economic pain → More stock market declines → Onward and onward, the cycle continues until… ENDTIMES.
Yet, even as you and I feel the above, we are, mind you, emotional beings just like any other investor, we know the knee-jerk analysis above couldn’t be further from the truth.
Global investors instantaneously price in new information based on future cash flow expectations → Stocks go up (usually) but sometimes down → If down, a decline in earnings, a recession, or high uncertainty (i.e. the COVID bear market) may be being priced in → Stocks will recover not when the news becomes better, but when it becomes slightly less bad as new information and future cash flow expectations become priced in.
Notably, stocks can and often do recover even as the economic news worsens. This is the part that nobody seems to understand, but you can solve it with a simple heuristic:
The economy and the stock market are related, but they are different. So don’t confuse one with the other.
Here’s another one:
The stock market is forward-looking. The economy is rearward looking.
As investors, we must always focus on the future. And when I say future, I mean 10, 20, or 30 years from now. Do you think you’ll remember this blip of time in 30 years?
These are concepts you must ensure your clients understand. Then, remind them often, especially during bear markets.
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