How on earth can a market drop 300 points one day and then gain 300 points the next with the same key issues being at the forefront of investor minds? It can be hard to believe, but that is definitely how today’s momentum filled market can trade on a day-to-day basis. Clearly, the fundamentals don’t change so quickly that a huge gain or loss in a single trading session would be warranted, but this is what happens inside a volatile market.
As someone who has seen this happen for quite a few years now, the biggest key I can remind investors of is that the stock market prices of today are only perceived value, not the actual value of a company or an index. Some people religiously follow the stock market to let them know the value of a company, and this can lead to some real confusion at times. Take a look at fears in the recent quarters about Europe. The worries are legitimate, but some corporations have a whole lot more riding on Europe than others. The typical market response is to throw the baby out with the bath water, meaning even those companies that shouldn’t be implicated indeed are.
Do the fundamentals really matter? It’s a question that many investors ask during times where valuations just don’t make much sense. The truth of the matter is, it may be hard to see at certain times, but the fundamentals will always matter in the end! I like to tell investors that it is helpful to think of short-term volatility as “noise.” This noise makes it much easier to take your eye off the ball and forget fundamentals, but doing so is a major mistake.
In the economy, it is impossible to have an extended strong period of growth without solid levels of consumer spending and a healthy job market. Short-term incentives or easy year over year comparisons may skew things for a limited period of time, but in the long run it is the fundamentals that matter. In same manner, the stock market will always eventually have to pay attention to fundamentals. Take a look back in history at stocks that zoomed off to the races despite never being profitable and you’ll find a whole lot of ugly looking charts when the fundamentals start to matter to investors. In the end it comes down to profitability and the health of the balance sheet. Keep your eye on the ball and stay tuned to the fundamentals of the stock market.