Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Stock investors, like fish, swim together

- by Alan Duvall 

Published in Dayton Daily News August 13, 2006 

The other day I had my nose pressed against the front of a large residential aquarium observing a school of pretty fish.  Obnoxiously, I tapped the side of the tank.  The school swiftly swerved in perfect unison to the other side.  TAP!  They darted again in synchronized formation to avoid another menacing finger. 

Stock investors are like fish.  Swimming together in unified schools veering instantly at the slightest sign of a market TAP!  One day the market skyrockets 100 points – next day plummets 100 points.   

I read guru explanations for the deviations - new statistics released on consumer spending, housing markets, manufacturing orders.  But somehow I still don’t get it.  What did I really learn today that would cause me to instantaneously alter my view of the future? 

I have a friend who long ago sold his business and retired to become an active daytime trader.  He meticulously applies reasoned business principles to his selection of stocks.  He has accumulated immense losses - his business analysis pummeled by the fish effect.

Is there a consistent TAP to watch to somehow predict which direction investor fish will swim?  Perhaps interest rates.  If investor fish believe the Federal Reserve will increase rates – overall stock prices tend to decline.  Conversely falling rates foster higher stock prices.  

Take this theory to the max and we reach the frustrating conclusion good news for the economy is actually bad news for the stock market – and vice versa.  To illustrate, assume jobless claims decline for the week.  Good news?  Not for the market.  Follow the fish logic.   

More jobs means consumers have more money to spend.  Greater spending may increase the cost of goods due to surging demand thereby causing higher inflation.  The Fed hates inflation so it raises interest rates to reduce consumer borrowing and thus spending.  Higher interest expenses depress corporate profits driving down stock values.   

So good news becomes bad news and aquatic investors flee the market driving stock values to the depths.  

But does this really make sense?  Couldn’t you also argue good news means an expanding economy creating more spending thereby increasing corporate profits in turn generating rising stock values?   

Seems logical to me – but the fish aren’t biting.  TAP!  TAP!  

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.