Maybe the start of the Fall season has me feeling nostalgic but I've been thinking about the movie Ferris Bueller's Day Off from 1986. Remember Ben Stein's character as the economics teacher? "Anyone? Anyone...?". I wish Mr. Stein were writing the headlines today.
Think back to February when we were at the outset of what would turn out to be a series of events that would touch every corner of life. We didn't know what the future held. All we had was new information and uncertainty about what it meant. Investors responded rationally by adjusting the amount of return they demanded for continuing to own the stocks of every company from Apple and Amazon to Southwest Airlines and Callaway Golf.
That may not be the narrative the media put in their dramatic headlines about the stock market but it's the truth. Stocks don't "plummet", "tumble", "swoon" or "surge". They don't do anything on their own. Stocks are just financial instruments allowing people to participate in company growth over the long term as fractional owners. Current and potential owners of a company's stock make judgments about its future profitability based on new information. They adjust the
amount of return they demand going forward in exchange for taking on the risk of being an owner and possibly seeing the value of their shares decline in the near term.
The decision tree looks like this:
- If there's an expectation future profits will be lower, investors will be willing to pay less for the stock today (the stock price declines) thereby demanding more
return going forward.
- If there's an expectation future profits will be higher, investors will be willing to pay more for the stock today (the stock price increases) thereby demanding less return going forward.
- If there's uncertainty, investors tend to want to pay less (the stock price decreases) simply to give additional "return cushion" in case things turn out worse than expected or until new information becomes available. They demand more return in exchange for accepting uncertainty.
It's hardly headline worthy when seen for what it really is. It's also why we manage portfolios at PBL Wealth Management such that the growth side of a client's portfolio (the part invested in stocks) is money that won't be spent for years. The spending timeline we build into a client's portfolio means they don't have to worry about price changes in the short term since that part of the portfolio does not need to be spent anytime soon.
Uncertainty will persist even as our collective understanding of what is possible has expanded as a result of the events of this year. Investors will continue to behave as they always have though. Day to day price changes in stocks are nothing more than investors evaluating new information and adjusting the amount of return they demand going forward. No drama.
My hope is this helps you see past the headlines no matter what is going on in the stock market today, tomorrow or whenever. Your financial plan and your timeline for spending money on things that matter to you are interesting. The rest is pretty boring. Anyone? Anyone...?
