Markets always do WHAT they are supposed to do, not always WHEN they’re supposed to do it!

The ebbs and flows of the financial markets are a result of the continual battle between investors who are debating where the economy is heading. Bond traders’ impact what happens to intermediate and long-term interest rates based on their view of economic growth, inflation, and other variables. You might say they are a barometer for overall economic conditions. The equity markets reflect what stock traders believe will happen to stock valuation in the coming months. They use information from what bond traders are signaling and then apply it to formulas designed to forecast what a stock will be worth in the future. Based on that assumptive future valuation, they determine what they should pay for that stock today. It’s called discounting future value.

Mr. Market

Even under normal conditions, this continual “debate” between the Bulls (optimists) and Bears (pessimists) results in changes in interest rates and stock prices that can make your head spin. Benjamin Graham, often referred to as the “father of value investing” and mentor to Warren Buffett, invented an imaginary investor in his famous book The Intelligent Investor named Mr. Market. Mr. Market makes investment decisions based on his moods which can swing from panic to euphoria. His mood changes are far from gradual therefore he buys and sells very frequently, mostly ignoring fundamental data, and instead focusing on the latest news.

Make Rational Decisions

I believe that Benjamin Graham invented Mr. Market to illustrate that investors must always remain calm and make rational decisions. If you look at a stock market chart (I usually prefer to look at the S&P 500) with at least 10 years of data, the jagged line representing the month to month price movements seem insignificant, and the overall direction of the plotted line is upward as you look from left to right. Even with the recent sharp drop in prices, you would have been way better off had you been in stocks as opposed to cash. Now, if you have read my thoughts before you know that I am not a proponent of simply buying and holding. I do believe that investors should apply reason and analyze data before making investment decisions. If you are not willing to do the work, then you should consider hiring a professional. Just make sure that professional does do the work!

Conclusion

In the end, the market will react in accordance to the economic reality. The market doesn’t determine what the economic reality is, that would be like the tail wagging the dog. Therefore, making decisions based on the headline that is driving the market on any given day is dangerous. Remember that media companies are in the business of keeping you glued to their programming. That is why you see words like SOAR and PLUNGE in bright red and green. They need to grab your attention and then keep it. Fight the urge to focus on headlines, take a deep breath and stay calm. You can navigate through the current storm, and once it is over there will be another and then another. Remember that history doesn’t repeat but it does rhyme.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of the author, and not necessarily those of Raymond James.

This article was written by Gus Vega, Certified Financial Planner, Total View Advisors and Branch Manager with RJFS. He can be reached at 786.315.4870, 9155 S. Dadeland Blvd. # 1014, Miami, FL 33156. Total View Advisors is not a registered broker dealer and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.