ONCE YOU GET BEYOND index funds, I’m out of my league, so I ask this as a naive investor. Can someone please explain the stock market to me? Okay, I guess that’s a trick question—because I don’t think anyone can explain the financial markets to anyone.
I’ve heard that markets are forward-looking. If that’s true, how come stocks react wildly to information that has been publicly anticipated for days, even weeks? Why the big surprise?
Take inflation. It’s high, we all know it’s high, and we all know it’ll take time to bring it down. Yet the day after an announcement that inflation is no better than the previous month, the markets tank. Who’s not paying attention to the news?
I’m mystified when the price of a stock falls because the company’s earnings miss analysts’ estimates. Why can’t it be that the analysts messed up and the company is doing just fine?
The price of a stock fluctuates mostly based on earnings and anticipated earnings. Why? If a company beats its earnings estimate, why should its stock price rise? Investors are willing to pay more for a company with growing earnings, I’m told. But even if earnings rise, an earnings announcement can tank the price of a stock if the company’s profits are off by a few cents a share—in a single quarter, no less. It sounds like pure gambling to me.
Ah, earnings. Why should I care about earnings, anyway, if they’re not shared with me? I like dividends, at least they’re real. The company gives its shareholders some of what it earns. On the other hand, if earnings are rising and dividends are not, we’re back to the never-ending argument that earnings growth leads to higher stock valuations.
It’s even more mystifying when a company pays no dividend while its stock soars—in anticipation of what? Dividends someday? The anticipation of higher earnings can cause a stock to rise, yet still there’s no dividend. The company is reinvesting in the business, we’re told. What does that mean to me?
By themselves, earnings are suspect. How were they generated? Was there a stock buyback that increased earnings per share without a rise in overall profits? Or maybe expenses were cut, layoffs conducted. Seems to me such earnings are bogus.
I track one stock closely, my former employer’s. It accounts for 40% of my non-retirement investments. The stock has paid—and increased—dividends for 115 years. I’ve been reinvesting mine in more shares for the past 52 years. I’d say that’s a pretty stable stock.
Yet, within the past six months, the “experts” have set target stock prices of $87, $84 and $75. As I write this, the share price is $62.85. At the same time, the recommendations have been to “buy,” “hold” and “sell”—sometimes all at the same time from differing analysts. What value is there in all these predictions? What are average investors to think, or is all this guesswork for traders betting on a 50-cent change in share price?
At the end of the day on Sept. 20, The Wall Street Journal reported, “Stocks fell Tuesday ahead of the Federal Reserve’s next policy decision as investors grappled with the impact of rising rates on corporate earnings and valuations.” Wait, investors were surprised? And, again, there’s that obsession with short-term earnings.
On Sept. 21, the markets were up at noon, even though everyone knew the Fed was meeting that day and likely to raise interest rates by 0.75 percentage point. The headlines blared, “Another big interest rate hike is coming.” No surprise at all. Sure enough, interest rates were raised exactly as predicted and the markets dropped—big time. My question is, what did investors learn at 2 p.m. that they didn’t know at 1:59 p.m.?
Is there any wonder that many Americans are afraid of investing in stocks, or react irrationally when they see a decline in their 401(k)? Is there any actual difference between New York’s “Street” and Las Vegas’s “strip”?
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.
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