Rathbun: The Great DisconnectWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
I was thinking over the weekend how much things have changed since I started in this business many years ago. Back then, it was general knowledge that bonds and stocks reacted the opposite to each other. Interest rates floated a little freer in the market place and buying a new house required at least 20 percent down and even then you might need a co-signer.
Buying a new car meant that you took out a three-year loan and paid it off early. The reported inflation was closer to reality and if you became unemployed, you were greatly incentivized to find a new job as soon as possible because you only had 26 weeks of unemployment insurance and then it ran out. Each week, in order to get your check, you had to go to the unemployment office and be evaluated in order to be deemed worthy of getting a check.
To be on Social Security disability, there was a 12-month wait where you needed to prove you were incapable of any gainful employment and then it would take another 12 months before you got your first check.
Financial times have really changed. As I thought about all of this, it came to me that one other change has occurred recently and that is the market (meaning stock market) and the economy (meaning where you and I engage in commerce) has become disconnected.
Fundamental and technical analyses are no longer directly determinate of the price movement of an individual company. The market moves more based on media headlines than on underlying economic data. Bad news is good for the market since it indicates that the Federal Reserve will keep on printing money out of thin air to keep it going up. Good news is OK as long as it isn’t too good. If the news is too good then the Fed may start to taper back the printing of money out of thin air and therefore cause the market to go down.
It doesn’t matter as much as it used to if a company has a great balance sheet and good management (i.e., fundamental analysis). Likewise, it doesn’t matter if a company’s stock is breaking below its 50-or 200-day moving average, reaching new highs, has high or low volume or if its relative strength is moving in the right direction or not. Sure, all of these things go into the equation but they don’t carry as much weight as before.
I have said many times that I don’t care what the market does or why, just as long as I can get some indication as to the direction. Knowing that the market is disconnected from the economy and will move based more on headlines than on concrete data helps, but it makes me cautious because as irrational as the market has been in the past, nothing is more irrational than the media and how it communicates information.
I used to say that with the advent of the Internet, most people could not distinguish information from knowledge and more importantly, knowledge from wisdom. It is even more difficult today trying to distinguish truth for misleading data and usable information from noise to make an informed decision.
Now more than ever, it is important to be able to distinguish the wisdom from the noise and formulate a plan. With the economy disconnected from the market and vice versa, being able to hedge your risk is critical and the only way to try to get any returns out of the market and protect yourself to be able to invest another day.
I truly believe that the day will come when the market reconnects with the economy but not until we, as a country, are willing to deal with the reality of deficit spending and national debt at unsustainable levels.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard on 1370 WSPD at 4:06 p.m. on After the Bell, every day on the Afternoon Drive, and every Tuesday, Wednesday and Thursday evening at 6 p.m. and Monday through Friday at 10 p.m. throughout Northern Ohio on Eye on Your Money. He can be reached at (419) 842-0334 or email him at firstname.lastname@example.org.
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