Recently, people have begun to draw all the wrong conclusions about the stock market for all the wrong reasons. It is a common phenomenon and it happens every time the stock market moves up or down long enough for the average citizen whose only market investments are in IRAs or 401(k) plans to notice.
The first bad conclusion is that now is the time to pull money out of the market. While this market has fallen long and fallen fast, it is almost always the case that when the average person looks to get out of their investments, they have already fallen significantly which means that getting out now just means locking in losses, especially because precious few of them have any idea about when or how they will get back in.
The second miscalculation that continuously happens to virtually everyone who is not a seasoned investor is the mistaken notion that the stock market is moving and pricing based on now, as in today. It isn’t.
The stock market is now, and has always been, priced based on the future. Investors buy stock not because the stock will be higher today, but because it will be higher in the future (day-traders excluded.) Thus, when a professional investor looks at GE or IBM in today’s market they aren’t interested in today, they are interested in next quarter, next year, next five years, or whatever.
This all adds up to the stock market being what is known as a leading indicator.
- Leading Indicator
- A tool or system whose value indicates the direction of movement, usually in regards to the overall economy, prior to the actual change occurring.
The catch to this, of course, is that no one knows precisely how far out the market is leading, nor how far forward the masses who buy and sell stocks each day are looking. So whether today’s drop in the stock market signifies predicts a drop next quarter or next year is difficult to ascertain. The best one can hope for is to see clues or signs that things might be changing soon.
One such sign may have popped up today.
While it is possible that this is an anomaly and that it means nothing, it may also mean that some of the big money out there is starting to think that prices are at the levels where buying makes sense. A $41 billion deal isn’t the kind of thing you throw together because you are bored on a Sunday afternoon. Merck must see some value at that price in Shering-Plough.
Obviously, a single data point is meaningless in predicting anything, much less the stock market, especially coming on the heals of the yet un-accepted Roche offer for Genetech. It is possible that this is nothing more than biotech consolidation, which is good for the long term, but hardly bullish.
However, if this marks the beginning of a series of mergers and acquisitions, it will be time to start looking at where you want to put your investment dollars for the beginning of the next bull market.