Wall Street: What were you expecting?

“Cli­mate is what we expect, weather is what we get.”

—Mark Twain

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.

The infor­ma­tion and opin­ions in this col­umn are pro­vided only for edu­ca­tional and enter­tain­ment pur­poses. Any ref­er­ence to a finan­cial prod­uct or strat­egy is not to be con­sid­ered an endorse­ment or rec­om­men­da­tion. The infor­ma­tion is of a gen­eral nature only and does not take into account your indi­vid­ual objec­tives, finan­cial sit­u­a­tion or needs. It should not be used, relied upon, or treated as a sub­sti­tute for spe­cific pro­fes­sional finan­cial, legal or tax advice. Invest­ment Per­for­mance may vary due to tim­ing and expenses. Rc rec­om­mends that you obtain your own inde­pen­dent pro­fes­sional advice before mak­ing any deci­sion in rela­tion to your par­tic­u­lar require­ments or circumstances.

Posted by RC Arseneau on Jul 10 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.