The Stock Market Is All About Expectations

Oct 12, 2011
J. Webster
Comments Off on The Stock Market Is All About Expectations

There was a very interesting piece in The Washington Post by Jia Lynn Yang the other day, ‘Stock Market, Economic Growth Don’t Necessarily Follow the Same Track, Data Suggests.’

In a way the article supports the concept that it doesn’t really pay to chase stocks, you’ve to to buy them when they’re hated and beaten down, when the economy is in the tank, not running rampant and growing like crazy.

Sure, you can still make money buying stocks when the economy is in full swing, but the real money is made when you buy stocks at the low end of the business cycle. And I’m sure that’s when guys like Warren Buffett most likes to buy stocks. The question now though is, where our are we at in that business cycle right now? The article says there’s a one to six year trend for businesses to grow profits and then a three year drop off, that 1-6 period is quite a range…

The business cycle tends to occur over just a few years, whereas the expansion and contraction of the economy tends to happen over decades, Easterling said. As companies make more money, rivals enter the market, creating more competition and lowering profit margins. Profits tend to rise for one to six years in a row before falling for one to three years. According to Easterling, earnings have never risen seven years in a row.

So where are we now in the business cycle?

Companies have been posting impressive profits for a few years, and even though the past few months have been volatile for investors, the S&P 500 has climbed out from the darkest days of early 2009. History suggests, according to Easterling, that companies will not be able to keep up this pace of growth and that stocks are vulnerable right now.

Full article is here.

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