STREET DOGS

No discussion of the interrelation of stock prices and business conditions would be complete without emphasising that in the clash of speculative forces on the exchange, emotions play a part that is not paralleled in the normal processes of commerce and industry, says Barnie Winkleman in his book, Ten Years of Wall Street. “The golden mean is nonexistent in Wall Street, because the speculative mechanism does all things to excess; even the reactions from the heights of fantasy and from the depths of despair are accompanied by convulsions which are distinct from the calmer tenor of business. Those who seek to relate stock movements to the current statistics of business, or who ignore the strongly imaginative taint of stock operations, or who overlook the technical basis of advances and declines, must meet with disaster, because their judgment is based upon the humdrum dimensions of fact and figure in a game which is actually played in a third dimension of the emotions, and fourth dimension of dreams.”

A lot of investors make the mistake of forecasting the stock market on the basis of economic data – which relates to events that have already taken place. This is a mistake, because the stock market leads rather than follows the economy. It would make more sense to use the market as an indication of what the economy is likely to do in future.

“You know what we haven’t been asked in the last month?” Adam Parker said in a note to Morgan Stanley clients. “What is the growth in earnings implied by today’s price? How has your view of that trajectory changed this year? Which areas of the market may show accelerating growth in cash flows? What is the future value of all cash flows discounted back to the present? How have your assumptions about growth or rates changed recently?”