happen. When you assume, you make an… well, you know the saying.
The trouble with market assumptions is that if everyone makes them, they
might already be completely discounted. As a result, what you are concerned
about may indeed be a real worry, but, ultimately, might not have any actual
impact on stocks if the market has already correctly adjusted for it.
For example, hundreds of experts back in 2008 were predicting the end of the
financial world. They just assumed a complete financial collapse was coming. But
at one point in the crisis more than 1,000 companies were trading below their
net cash position. Even in a meltdown, these companies’ stocks might have still
gone up. As it happened, these companies soared since there wasn’t a
That’s how it goes with assumptions so let’s look at five common assumptions
in the market right now, which will hopefully cause investors to reflect on
whether they should do anything about them in their portfolios.
Rising interest rates
Everyone now more or less assumes interest rates are going to increase. How
could they not since U.S. Federal Reserve stimulus has kept rates artificially
low for a long time?
But remember: There is no rule that states rates must rise. In weak economic
conditions and low inflation, rates could stay low for decades.
All those investors who panicked this summer and sold their fixed-income
securities need to stop and think, “Has the market priced in more rate increases
than will actually happen?” If so, fixed-income stocks might still go up, even
on small rate hikes.
Everyone knows September is the worst month for stocks so lots of investors
try to preempt the month’s decline by going to cash.
Except the market so far this month has done remarkably well. At the time of
writing, the Dow Jones was up 700 points in September; and the TSX was up almost
200 points. Again, maybe the common assumption was already well priced into
Most investors assume earnings growth is going to slow down. How can
companies, they ask, continue to reduce costs and drive up profit margins year
Well, maybe they can because of technology. Companies keep spending to speed
up production and make workers more effective. That’s one reason why so few jobs
are being created — bad for the unemployed, yes, but great for company
We certainly don’t think anyone should assume neither technology improvements
nor company greed for more profit are going to stop anytime soon.
Recovering junior gold stocks
Many investors, still hanging on to their junior gold companies, are assuming
the sector has to recover one of these days. We kind of assume the same thing
since the sector has been ugly for years now. Again, though, there are no rules
that say the gold sector has to improve any time soon.
Certainly, in the short term, having stocks down 75% this year will likely
just result in more selling in the sector. The stocks could go up or down, but,
for the sake of your portfolio, you should not assume one is going to happen
over the other.
Hot IPOs will surge
All the buzz now is on the upcoming Twitter IPO. Like Facebook, everyone just
assumes it will be a killer IPO. As Facebook learned, though, the greater the
hype, the greater the assumptions, and the bigger the fall. Analysts who called
Facebook a “sure thing” looked pretty bad when its stock fell to less than half
its issue price.
We have already had clients asking how they can get a piece of the Twitter
IPO. They are assuming it will go up even before the valuation on the deal has
been released. That is way too much of an assumption.
In general, assuming things often gets you into trouble — whether it concerns
your life, the weather, your relationships or the market. Keep that in mind the
next time you are sure a stock is going to go up.
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