Wall Street: What were you expecting?
“Climate is what we expect, weather is what we get.”
Dec. 25. As a child, I spent 364 days each year just dreaming of what this day would feel like. From Thanksgiving to Dec. 24, I would comb through the JCPenny and Sears Christmas catalogs fervently marking pages and meticulously planning what would eventually become my Master Wish List. I would end the ritual by strategically placing my carefully crafted list alongside a persuasive snack of milk and cookies. Then, with expectations set, I would close my eyes, dream a wonderful Christmas dream and awake to Christmas Day.
Last Friday opened with a June jobs report showing that the economy had added 80,000 jobs holding the unemployment rate at 8.2 percent. Adding jobs is good right? Why is everyone so negative when jobs are being added? Probably, one of the most misunderstood areas of financial data and the news reports that follow, is how to interpret the numbers that are released by the government regarding jobs, housing, gross domestic product and so on. Why is it that the market may go down when jobs are added, but go up when the numbers are absolutely horrible? The key is understanding that it’s not so much what the actual number is that’s important. It’s what the actual number is when compared to what it was expected to be. Put another way, it’s not that a slingshot was so bad on Christmas day, but it wasn’t the Red Ryder BB Gun that was on your list. You see, before each economic report is released, financial analysts and related financial gurus all take their best guess as to what the numbers will turn out to be. By the time the actual number is released, the stock market has priced in its expectations and dreamed a little dream, hoping to awaken to the exact number it had in mind. If the number is better than expected, whether it is good or not, the market will cheer with enthusiasm that the day was even better than expected. If the number is worse than expected, whether it is bad or not, the market will churn with great disappointment that it’s expectations we’re so misguided. Just when you think you might understand how this system works, an extremely good or bad number will come out and the market will react in exactly the opposite direction that you expected. How can it be that the economy loses 30,000 more jobs than expected and the market rewards with a rally? Please welcome to the stage, government intervention. You see, if the market expects the economy to receive government assistance if it gets really bad, it will cheer in recognition that the calvary is coming. It’s like the year you had opened up all your Christmas presents, except one, and gotten only Underoos, a banana and a Christmas Lifesaver Book. You knew that this last gift was gonna be the one. Surely, there would be some redemption to balance out your childlike expectations. Sound crazy? Welcome to Wall Street meets government.
RC Arseneau is a Certified Financial Planner and lives with his family in Delaware. Please submit any questions or topic requests to AskRc@mail.com.
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