Expectations drive the market. Every stock price is driven by what people expect the company to do. Thats why all the talk about a strong or weak economy has such an impact. But those arent the only expectations moving us. Weve seen the impact of war and terrorism worries on markets and the impact of SARS concerns on Asian markets. Markets move on a combination of expectations and reality, and every reality leads us to new expectations. Great earnings? I expect the company will earn more. A sales slump? I expect the company to struggle next year too. The question is: if all decisions are made on expectations (and they are), how can things turn around? If our expectations are so colored by past events, well expect the future to be as grim as the past, and nothing can ever change, can it? Ah, but we have long memories. Ask yourself: what would it take for you to change your outlook? What would it take for all of us to change our outlook? The answer to that last question effectively tells us when the market will turn, because when everyone is upbeat and buying, the market will fly. Consistently rising earnings will change expectations, but how much positive news is necessary before the turn begins? Will some companies turn before the market? Consider Constellation Brands or Fortune Brands, two of our recommendations that havent seen any drops, and in fact are defying estimates of weakness. Should we expect those shares to rise based upon their own positive trends, or will the market turn first? The answers arent simple or uniform. Theres no answer, only conjecture. We can make estimations. In the past, weve seen market turnarounds led by small stocks or led by big stocks, led by technology, or led by consumer goods. So, as we near the turn, youll likely hear all kinds of suggestions for where the upturn will begin. Preserve your sanity with a little skepticism. I suspect the first to turn will be the ones that have had the best results for a long time. Thats precisely why were so aggressive in our recommendations of companies like Fortune and Constellation. If they are successful in maintaining their records, this type of firm will rise sooner than the rest. It doesnt matter whether the companies are big or small, techie or traditional. The best companies will start the upward move. Without support from a strengthening economy and a rising market, even these success stories cant rise far. Thats why expectations of the broader economy are important. Thats where well have to wait and see. Expectations should rise now with the ending war (with stock prices and consumer spending following). Expect some good news for a while. Surprises from companies like McDonalds will also provide a boost. Surprises shake people out of expectation ruts. When weve become too negative (or too positive), a shock can wake us up to the change. Lets hope that McDonalds profit boost is a harbinger of things to come. While the longer term still holds some uncertainty, there is hope. Success is largely a matter of recognizing expectations, and following through when we see an opening. For the moment, at least, there appears to be an opening. We dont know yet what the future holds, but the present looks good. |
