Will Your Stocks Go Up or Down?


Two weeks ago, Wells Fargo announced better than expected earnings and record numbers. You would expect their stock price to soar. But did it?   No, it went down. It reminded me how a few years ago Exxon Mobil announced that they earned more money in a single quarter than any company had in history. What happened to their stock price that day? Like Wells Fargo, it went down.

It seems to make no sense, does it? Companies announce record earnings, their stock price goes down. Companies announce they are losing money so they are laying off thousands, and what happens? Their price goes up. What the heck is going on?
What we need to remember about stock prices is simply this: Today’s value of a company has absolutely nothing to do with what that company has done in the past. It has everything to do with what everyone expects that company to do in the future.

In the case of Wells Fargo, investors saw the past quarter as being really good. That was great, but they also saw that mortgage applications have dropped dramatically, which they expect will hurt Wells Fargo’s earnings in the future. Therefore, the stock price went down.

Here’s the problem with all of this. Can you tell me with any certainty what will happen in the future? You can make guesses. You can judge probabilities. But the unexpected has a habit of rearing its ugly head, doesn’t it? When the unexpected says hello, it can throw all of your guesses and probabilities out the window and create a new reality.

If you are honest and you pay attention, you will find that the unexpected shows up far more often than you want it to. As a result, guessing what will happen in the future becomes iffy at best. And that means that current market valuations may also be iffy.

That’s why markets are so volatile. New information comes into play every day. That new information is often filed under the category of unexpected. The result – markets start moving dramatically as they factor in the new information.

This is how stocks are priced, and together, how the market is valued. Clearly, it’s a bad environment for the portions of your portfolio that need to deliver income to you day in and day out. It’s fine for taking chances. It’s not fine for core income.

Keep that in mind as you prepare your overall retirement plan.

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