Ladies, don’t get mad at me here, but I always thought the stock market was like a woman. A particular kind of a woman, that is. Remember the Fellini films of the nineteen seventies? There was usually a gorgeous Italian woman who was adored and pursued by all the men around her. But as lovely as this woman was, she was always loyal and passionate to her lover. Maybe a little too passionate, though. At first, she seems like the ideal companion. (Ladies, just smile and breathe). She cooks and cleans for her man without complaining. When he comes home from a hard day’s work, she greets him in a smart, sexy black cocktail dress and a hand-crafted martini. She is super sexy and treats him as if he were the king of the world.
From the outside, what man wouldn’t want to be with this woman? Well, as the saying goes, looks can be deceiving. When the couple goes out to dinner, the husband has a roving eye and flirts with the waitress throughout the evening. His wife finally gets fed up, throws a drink in his face, and kicks him in the shins with her stilettos. The husband begs for forgiveness, orders her favorite desert, and feeds it to her in a very sexy, romantic way. Everything’s fine until they stroll down the street, and he waves and shouts “hello” to an even more beautiful woman. Well, that’s it. His wife starts screaming at him calling him a no-good cheater and liar and hits him in the head with her purse. He puts his hand up and tries to tell her something, but it’s too late. She spats in his face and kicks him in the shins again. While he’s hopping on one foot trying to tell her something, she turns and runs away from him
He catches up to her and knows he’d better keep some distance. (He doesn’t want that stiletto to find a more sensitive spot). They start yelling back and forth at each another, and he’s pleading with her to listen to him as she starts walking away. He grabs her, wraps her in a bear hug, and puts one hand over her mouth. As she struggles and squirms trying to free herself, he explains that the woman was his cousin, Sophia, who was visiting from Florence. Our heroine is released and, ashamed of her behavior, starts to sob to the point where it looks like she’s having a seizure. Her husband embraces her, and she starts to kiss him passionately, telling him how much she loves him, and that she will never misbehave again. (Of course, Sophia is not really his cousin).
Now back to my analogy. The stock market can be very emotional and illogical in the short term. Think about how the market overreacted last month to the Federal Reserve’s chairman, Ben Bernanke, when he announced that the Fed may stop buying billions of mortgage bonds each month. Mr. Bernanke clearly stated that the Fed would enact that strategy only if the economy was strong and could stand on its own. And when the Fed does stop buying bonds, it will be over a period of several months. But if the economy is weak, it will continue to buy bonds. Mr. Bernanke knows that too much influx from the Fed could cause hyperinflation.
Now most people in my business are politically right of Attila the Hun. They claim they hate government intervention and consider government programs akin to communism. Unless, of course, they feel that program will benefit them. It’s just like a three-year-old who steals a lollipop and cries when his mother takes it away from him. So the markets, much like our Fellini gal, overreact and make everyone’s life miserable. The emotion does not look at the positive factors such as healthy corporate profits, decreasing unemployment, and an improving housing market. Instead, the markets overreact to the weaker aspects of the economy, most of which has not even happened, but they fear it will happen. Mama Mia!
So just like our beautiful Fellini woman, the market is very volatile and emotional. In the short term, that is. Over the long term, it is very rationale and rises with the ever expanding economy. Just like Yoga, try to remember that the economy is abundant and not a zero sum game. Here’s a clear example of what I mean. Right now, I’m writing this article on July 15 2013 and the Dow Jones Industrial Average and the S&P 500 are scaling record highs. Let’s put this into perspective: After World War II, the S&P 500 was priced at 14; today it is priced at over 1,600. That’s a 7.4 percent annualized return (and does not include the dividends which add another 2.5 percent or so to the return)! For that kind of return on my money, I’ll take a few kicks in my shins!