The financial media bombards us with attention-grabbing headlines designed to get us to read their articles so they can sell more advertising. Often times, their “news” is nothing more than noise that can distract thoughtful investors from really understanding what’s going on. Today, we’ll take a look at the business cycle and the stock market cycle to learn how economic fundamentals–not noisy headlines–are what we should ultimately focus on.
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“Fear sells” is perhaps one way to describe why financial media plays upon human emotions to draw more readers.
Unfortunately, investors who are drawn to scary headlines sometimes make bad investment decisions because they let their emotions get in the way. One way to overcome the “noisy headline” problem is to better understand the cyclical nature of the economy and the financial markets.
To help explain the business and stock market cycles, Bill Keen invited his Keen Wealth Advisors associate Matt Wilson to join us on today’s show. Matt is a Managing Director of Keen Wealth Advisors, a CERTIFIED FINANCIAL PLANNER™, and has been with Bill for nearly 15 years.
Join us as we learn how to separate the news from the noise so we can become better investors.
Five Quotes From Bill Keen and Matt Wilson in This Episode
- The economy and the stock market are linked, but they don’t move in lockstep. We have periods where there’s a disconnect between what’s happening in the markets and what’s happening in the economy. We can have markets that are way too good relative to how well the economy is performing and markets that are not doing as well as the overall economy would suggest, said Matt.
- There are four stages to the business cycle and it’s helpful to understand where in the cycle we are at any given time. The economy tends to move from a peak, to contraction, to a trough, to expansion, and back to a peak to start the cycle over again. The disconnect between how the economy is performing and how the financial markets are moving happens when the financial markets start anticipating the next move in the economy. And the markets don’t always get it right. As the old saying goes, “The market has done a great job predicting nine out of the last five recessions,” said Matt. Don’t be distracted by the fear headline of the day. Instead, systematically look deeper into the economic numbers to discern trends and better understand what’s really happening, added Bill.
- It appears we are still in the expansion phase of the business cycle. While nobody can predict the future, we are not seeing signs of a peak economy at this point. It appears we are still in the expansion phase based on the multitude of indicators we monitor, said Matt. But this could change at any time so please consult with your advisor for the most current outlook.
- The stock market tends to move in a cycle, too. Long term, the stock market cycle is driven by economic fundamentals. But in the short term, it often moves based on changes in investor emotions. The stock market cycle could be described as moving from euphoria (at the peak), to denial (on the way down), to a trough (at the bottom), to relief and hope as it heads back up again, said Matt.
- There are ways to prepare for the business and stock market cycles so you don’t get “scared out” of your investments at wrong time. The keys here are to 1) have a financial plan 2) an income plan 3) a thought through retirement plan and 4) have money budgeted and set aside that’s outside the actual stock market to live on so that you’re never caught short or have to sell things at an inopportune time. Should you make proactive changes to your portfolio based on changes in the business cycle? In most cases, no, because your portfolio should be allocated in the beginning to get you through whatever the business cycle might throw at us, said Bill.
Bill Keen on countdown clocks…
There’s always a countdown clock in the media counting down to something big that’s going to happen, that’s going to be some negative event. Usually, the effect of the event is irrelevant for long-term investors so it’s important to keep that in perspective.
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