Do stock market outlooks matter?

The most common question on business news channels is about the stock market outlook.

Almost everyone coming on the show from the financial sector is asked that question.

Big names like Rakesh Jhunjhunwala, Raamdeo Agrawal, and other stock market experts are almost always asked this question on TV, news and social media.

Over 15-20 experts are asked this question daily. Multiply this with 200 trading days, and you get roughly 3,000-4,000 market views yearly (just on one news channel)

The other popular questions include:

1. Should investors enter at these levels (index levels)?

2. When will the next correction be?

3. What are some of the near-term risks in investing?

4. How long will the market rally continue?

It’s not only news anchors - but investors/viewers are eager to hear these market views. Why this obsession with market outlooks?

Investors are always looking to maximise their money

Investors are always looking to maximise entry and exit for their investments, and market outlooks allow them to do this. Although in reality, market timing never works.

History has shown that the only way to build wealth is via long-term disciplined investing (across good and bad markets).

Still, many investors have an urge to make quick money and hence try and time markets.

Most investors tend to suffer from loss aversion

Even long-term investors tend to be interested in short-term risks to their equity portfolio and hence do like the market outlook commentary.

Psychologically, humans tend to be risk-averse and always look out for potential risks or downsides in their investments, even if they are short-term.

Media tends to favour short-term activity

Mainstream and new-age digital media tend to favour short-term investing and trading. Interest rate movements, inflation, global economics, and quarterly earnings matter a lot for short-term traders.

There’s a famous saying - “In the short run, markets are a voting machine, but a weighing machine in the long run.” Feeding a voting machine makes for a better business, higher click rates and better engagement for media businesses.

Should investors take market outlook as predictions?

In no way should investors take market outlooks as predictions. Reliable experts always mention that market outlooks are only expectations of where markets are likely to be, and not predictions.

Investors should generally ignore or stay away from people trying to predict where markets will be in the short run.

So, why do market outlooks matter?

In reality, the prices of stocks are driven by expectations in the short run, and market outlooks are an excellent way of knowing those expectations.

Let’s take an example. Stock A delivered a 45% increase in profits last quarter, which is terrific. But the stock price is down 5%. Why is this? Is the market wrong?

The market is not wrong. The market expected Stock A to deliver 60% higher profits. Because the actual results were 45%, the stock’s price went down that day. For a short-term trader - expectations are essential to explain market movements.

For long-term investors - market outlooks help set expectations for their investments in the near term. But, in many cases, long-term investors are better off not knowing them.

In conclusion - the stock market in the near term reflects expectations. Market outlooks help communicate those expectations to investors. However, investors must not use market outlooks as predictions.