Stock market or market of stocks?

Investing in the stock market is not for the faint of heart 

By Morf Morford
Tacoma Daily Index

Many years ago, when I was first teaching introduction to business courses, I used to invite local business people and various professionals to visit and speak to my classes.

One of my most memorable visitors was a stockbroker.

His basic message was very simple – the stock market is not purely – or even essentially – rational or even measurable. The stock market, he insisted, was 95% psychological.

Fear, hope and wishful thinking have more to do with investing than production or profit margins he said.

One of the principles of literature, which I went on to study and teach, is that there are two aspects of every message – the image (or word) and its interpretation.

The same is true in the business world.

And in communication at every level. How often have the same words held very different meanings based on how they were said – not just the words themselves?

This is even more true in the world of investments.

Most of us imagine the stock market as a relatively objective indicator reflective of the health – and future prospects – of the economy.

We’d like to believe that the P/E (price/earning) ratio has some solid, unbiased anchor in the real world with costs, portfolio values and profit margins relatively stable and predictable.

The stock market, it is said, loves stability. Fortunes are lost – or gained – from market instability and chaos.

The balance sheet and the bottom line are the two guiding compass points for any business. Accounts should balance, and the bottom line should, like any good math problem, assure any stakeholder that everything in fact, “adds up”.

Stock market graph crPexels WEB

The stock market is not, however, a single entity. A better term to describe the stock market might be as “a market of stocks” – each stock (company) operating under its own demands and variabilities, its own threats and opportunities.

To put it mildly, investment in the stock market takes a strong stomach. The twists and turns of the market, even in a stable economy, can be disorienting. When the market drops, for example, should you pull your money out? Or invest more?

When the market rises, should you invest more because everyone else seems to think it is the best place to put their money? Or should you pull your money out precisely because so many investors believe that there is no other safe financial haven?

One of the reasons the US stock market has had rallies in 2019 is that so many economies around the world are faltering or even failing.

Many of the most solid global contributors to the economy, from Germany to Japan are stalling and several countries from Yemen, Sudan and Syria are in near total political and economic collapse.

Mix in tariffs, protectionism, currency fluctuations, cyber sabotage, floods of refugees and massive weather-related crop failures and you have a perfect recipe for market upheaval at every level.

So how is the investment climate?

As the National Association of Business Economics (NABE) puts it – better than you might expect, and worse than you might have hoped.

For the short term – and in some locations – and some sectors – the economy looks positive – in fact more promising than in decades.

Our local real estate market is just one example. But one expanding area of the economy is not necessarily representative of any larger market or investment trends.

And no market is infinite.

Like our recent and local real estate market, I expect the US stock market to rally toward the end of 2019. But I don’t see it as a good sign, and I don’t expect it to last.

We dare not forget the lessons that led us to an economic Depression that dominated the 20th Century. The collapse was more a loss of confidence than a drop in value of financial fundamentals.

We dare not forget the lessons that led us to an economic Depression that dominated the 20th Century. The collapse was more a loss of confidence than a drop in value of financial fundamentals.

Our stock market (like the US dollar) surges when it is seen as the investment vehicle of desperation – the last, best choice.

A recent survey of 53 professional economic forecasters shows a grim consensus – they expect another full scale recession by the end of 2020 – right before the next presidential election (http://fortune.com/2019/06/04/next-recession-2020-predictions/).

Actual political or economic threats are bad enough, but when the market, both local and on Wall Street, are primarily consumer (or investor) driven and investments (or purchases of any kind) are based on confidence in the future – either in the ability to pay or in the integrity of the market – you have the makings of a problem far larger than a standard recession.

Our economy, perhaps every economy, is based on trust. Do we trust our government, our banks, our employers? Those who work for or with us? Do we trust our social institutions like churches and local civic organizations?

A key principle of free market capitalism is the belief  in the “invisible hand” of the market (mostly based on the writings of Adam Smith).

The premise is that any business, more than anything else, wants to survive and will flex to meet any challenges or opportunities.

If our economy is truly 95% psychological, we can expect panic, false confidence and unbridled opportunity.

Following the stock market has been compared to riding a roller coaster.

It’s an apt metaphor. The principle is essentially the same – no matter how scary the ride gets, stay on until it’s over.

I expect the markets to roil for a while – with even more triple digit swings – and then a steady, probably dramatic climb until momentum builds and then another bubble.

As difficult as it will be, like the house-flipping fever of a few years ago, when everyone you know is in the market, it is time to get out.