In 1969 in her book “On Death and Dying”, Elizabeth Kübler-Ross revealed the five stages of grief. It took Elizabeth interviewing over 500 hundred terminally ill patients to discover the way we face bad life changing news.
In her book she detailed these stages as the following:
1. Denial – We immediately believe that “this is not happening to us, they must be wrong”.
2. Anger – In the second stage we ask “Why me, who is to blame for this”. It is important to note that when a patient is in this stage they are very difficult to care for because of their anger.
3. Bargaining – In this stage we attempt to do anything to get more time. We make changes in our lifestyle our beliefs just to get more time. We are hopeful these changes will bide us time.
4. Depression – In the fourth stage we become overwhelmingly sad realizing the certainty of the situation, we are going to die.
5. Acceptance – In the last stage we come to grips with our end, we can’t fight what is going to happen, the end is near and we need to make peace.
Wall Street leads us to believe that the market is some all-knowing oracle of future economic prosperity or failure. If we were to believe this perspective then we must also believe that there is some sort of divine intervention into the decision making of investors. The fact is investors, analysts and CEO’s have no idea of what tomorrow or next year will bring. They have no choice but to believe and preach their “own books”.
The markets are more logically the reflection of sentiment or in other words expectations. If the market is going up then expectations are building. If markets are going down then expectations are being lowered.
The most important point to in expectations to recognize is when they are too high or too low. If they are too high the margin of error is so slim that they can’t help but to fail. When expectations are too low the margin of error is at its greatest and they can’t help but to succeed.
The Expectations Indicator triggered a Bear Market on September 16th, 2011. The market was given a terminal prognosis and just as an individual would react, so do the markets.
In August 2011 the markets started to retreat aggressively from their highs while analysts and CEO’s stood scratching their heads. Their estimates remained unchanged yet the market continued to sell off. They denied the existence of the economic downturn while the fundamentals of the situation progressed.
In September Analysts and CEO’s reduced their expectations while blaming Europe for their problems. Their anger at the situation forced them to point fingers at Europe.
October brings one of the biggest percentage gains in the markets of all time. Analysts and CEO’s point to the United States economic strength as the saving grace to getting back to normal. They discount Europe as their problem and hope the “good old USA” will save them.
So here we are, USA is buying us time and everything will work out in the long run. Until we actually come to grips with the situation and enter the Depression stage of grief.
The fact it that income in the USA is down and consumer goods prices are up. When markets rally so do commodity prices, which add additional pricing pressure. Unemployment is the high and the data is not pointing to any near term improvement.
Eventually consumers will come to understand the promised greener pastures do not exist and we have to let go of hope to make room for reality.
To learn how to construct and track “The Expectations indicator”, read “The Art of Expectations”.