Marc Cuniberti: Reality vs. perception of the market
July 16, 2017
The markets go up, the markets do down. One expert says we are in the midst of a strong recovery while another expert says we are days away from financial Armageddon.
Who is right and why is there always so much disagreement?
It is human nature to disagree and with each opinion comes yet another.
The real question most investors are concerned with is not if there is an actual recovery or not but which direction the markets may go.
For only in an up market do most investors make money. And that usually is people's only real concern.
We could be in a recovery yet the markets could plummet, or we could be headed straight off a financial cliff and the markets could still be rallying. I have always said the stock markets of the world will reflect reality eventually but that their day to day movements are only the result of the perception of all the millions of players in it on any given day at any given moment.
For instance, while the housing market was starting to turn down in a big way in 2007, housing stocks were still going up, as most investors didn't see the coming crash and bought housing stocks right up until we were in the midst of the storm. The perception was that the real estate market was fine even though the statistics were starting to turn negative.
Housing stocks eventually reflected the reality of the bust and subsequently crashed and burned. One could draw the conclusion that perception first kept housing stocks up then reality brought them down.
With that thought in mind, how do we know how much the markets of today are reflecting economic reality or just mirroring investor perception?
I like to parallel markets and economics with examples in personal finance as there are simple comparisons that can be made which might shine a better perspective on what is actually happening in the bigger arena of world economics. By distilling one's view down to a simplistic model more easily understood, it's possible to better assess the macroeconomic picture in global stock markets and give us clues as to where we are actually headed.
Think of it this way. Imagine a neighbor who had always had new cars in his driveway and seemed to go on vacation every other month. His kitchen was recently remodeled and he wore the best clothes. Would you assume he was wealthy or would a part of you wonder whether he just was up to his eyeballs in debt?
Your perception of him might be quite different than his actual financial reality. As the famous investor Warren Buffet once quipped about financial realities, "only when the tide goes out do we find out who is swimming naked."
He meant that when financial malaise hits the general economy, those on financially precarious perches are quickly revealed, as such might be the case with our glitzy neighbor who in reality may actually been swimming up to his eyeballs in debt.
Now fast forward to what you think you know as to the degree of consumer and government debt that exists today.
What conclusions might you draw as to how healthy our economy really is? Are we running on the fumes of excessive debt or is the economic engine of America firing on all cylinders? Is the stock market running on perception or reflecting reality?
Answer these questions and you might be one step closer to assessing the financial health of our economy and therefore have a better indication which way the stock market will go in the near and far future.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at MKB Financial Services 164 Maple St #1, Auburn, CA 95603 (530) 823-2792. MKB Financial Services and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.