Which Stock Market?

Jun 19, 2019

In the 1987 movie The Princess Bride, The Sicilian criminal mastermind Vizzinni keepslisping the word, “Inconceivable!” Finally, someone suggests, “You keep using thatword. I do not think it means what you think it means.” 

 

That’s how I often feel when people use the term “the stock market.” Exactly which stock market did you have in mind?

When I think of the stock market, I think of apples. Not the iPhone company, the fruit. Ifthey ever determine that coffee or apples are bad for you, I’m not long for this world. Butwhen I go to the store for apples, I’m met by a bewildering set of choices: Rome, RedDelicious, Pink Lady, and so on. 

What ever happened to just…apples?

Likewise, when someone uses the term “the stock market,” they could be referring to one of the places where stocks are actually traded.

But more than likely, they are talking about one of the many indexes used to measure how a portion of the stock market is performing. And here’s where you get into apple varieties: when it comes to performance measuring indices, you can choose from the S&P 500, the Dow Jones Industrial Average, the NASDAQ Index just to name just a few.

So, let’s suppose your brother in law tells you the stock market was up 15% last year? Hmmm. Is this the same brother in law that tells you about the big bass that got away?

Setting aside the possibility of exaggeration, it would be important to understand what he means when he says, “the stock market.”

For example, last year (2018), the stock market index known as the S&P 500 wasactually down about 6.24%. But it’s now up over 10% for the year. 

Will those trends continue for the rest of 2019? Will the stocks that make up the S&P 500 continue to outperform other areas of the stock market? There are lots of opinions on both sides of that argument, but that’s all they are.

What I do know is that most experienced professionals will continue to counsel a broadly diversified portfolio. By broad diversification, I mean owning the stocks of large, mid-sized and even smaller publicly traded companies, most located in the US, but some located abroad.

It is important to remember that markets that go up (especially for a long period of time) may also go down. The reality (dare I say inevitability?) of price fluctuation should be taken very seriously for anyone committing any portion of their wealth to stock markets.

Your brother in law may fancy himself an expert in markets. Good for him. But the likelihood of your brother in law (or anyone else for that matter) being able to consistently predict the direction of the markets in the short term is…inconceivable.