Marc Cuniberti: Reality vs. perception of the market

The markets go up, the markets do down. One expert says we are in the midst of a strong recovery while another expert says we are days away from financial Armageddon.

Who is right and why is there always so much disagreement?

It is human nature to disagree and with each opinion comes yet another.

The real question most investors are concerned with is not if there is an actual recovery or not but which direction the markets may go.

For only in an up market do most investors make money. And that usually is people’s only real concern.

We could be in a recovery yet the markets could plummet, or we could be headed straight off a financial cliff and the markets could still be rallying. I have always said the stock markets of the world will reflect reality eventually but that their day to day movements are only the result of the perception of all the millions of players in it on any given day at any given moment.

For instance, while the housing market was starting to turn down in a big way in 2007, housing stocks were still going up, as most investors didn’t see the coming crash and bought housing stocks right up until we were in the midst of the storm. The perception was that the real estate market was fine even though the statistics were starting to turn negative.

Housing stocks eventually reflected the reality of the bust and subsequently crashed and burned. One could draw the conclusion that perception first kept housing stocks up then reality brought them down.

With that thought in mind, how do we know how much the markets of today are reflecting economic reality or just mirroring investor perception?

I like to parallel markets and economics with examples in personal finance as there are simple comparisons that can be made which might shine a better perspective on what is actually happening in the bigger arena of world economics. By distilling one’s view down to a simplistic model more easily understood, it’s possible to better assess the…

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