Matt Golab of Aaron Matthews Financial Resources Releases, "Can Stocks Predict the Future!?"

ELK GROVE, Calif. - June 27, 2014 - PRLog -- The worst periods for investment returns have clustered around major economic downturns such as the Great Depression, the high inflationary 1970’s, and most recently the Great Recession in 2008. Equity markets tend to predict these economic downturns months before they occur because investors will typically sell stocks in anticipation of a move.

The Dow Jones Industrial Average (DJIA) dropped an average of 8% leading up to the start of every recession since World War II, so it does appear that investors correctly anticipated an economic downturn prior to its arrival.

On the flip side, stocks also tend to move upward prior to the end of an economic downturn in anticipation of the return to future growth. Stocks increased by an average of 24% before the end of the last eleven recessions. Just as the DJIA predicted every recession since World War II, the index also rallied prior to each upturn.

Although equity markets are anticipatory, they are not always right. In fact, there are thirteen instances of the DJIA selling off in excess of a 10% loss (commonly referred to as a “correction” on Wall Street) with no recession in the following twelve months.

Markets falls an average of 20% every five years without the economy ever going into a recession. Although stocks are forward looking, they do not always see the economy through a clear lens.

The reason for such inaccuracy is due to the emotional component to the stock market. Participants often have conflicting goals, time horizons, tolerances for risk and ability to control these emotions. Therefore, markets can move in directions that do not accurately represent the future path of our economy.

Paul Samuelson, one of the most well respected economists in modern history, once famously said:

“Wall Street indexes predicted nine out of the last five recessions”

Sarcasm aside, this statement is quite intuitive because it drives home one of the most important concepts for investors to remember, and that is the economy and the stock market are not the same.

Equities are clearly anticipatory but they do not track the economy in lock step and are often wrong in their predictions. Therefore, the Investment Committee strongly urges investors to keep three important principles in mind at all times:

Look for Discrepancies: If fundamental analysis of the economy concludes that we will remain in an expansionary phase and stocks unexpectedly correct, take advantage of the emotional dysfunction in equity markets and buy into the weakness.
Maintain a Long-Term View: Economies move in cycles but the long-term direction is up and to the right, and the same goes for equities. For example, according to research from Bank of America, investing $1 in large company stocks back in 1824 would be worth approximately $4,225,000 today with dividends reinvested.
Never Attempt to Time the Market: Fundamental analysis cannot determine the direction of a market fueled by emotions. Those who attempt to predict the emotional ups and downs in equities are flat out gambling in a game where the odds are heavily tilted in favor of the house.

The bottom line is that sometimes the stock market and the economy are in sync with one another, but other times they march to their own tune. Focus on the direction of the economy and not the day-to-day moves in equities because it’s impossible to fundamentally analyze emotions. Since we see very little risk of falling into a recession anytime soon, we remain bullish on the long-term direction for equities.

Article Credit: Global Financial Private Capital, Comprehensive Wealth Management, LLC

Matt Golab was recruited to write a chapter in Tom Hopkins recent book, Victory which became a National Best Seller. Matt also received the Editors Choice Award for his contribution to Victory, not every contributor is selected for this high honor.

Matt is an authority on creating innovative tax and investment solutions to help his clients succeed in their retirement years.  The strategies Matt Golab has established and passed on through successful financial planning with hundreds of clients over the years has launched him into the national spotlight.

He is often featured in Retirement Advisor Magazine, a publication which attracts the top financial planners in the country. Matt has been featured in newspapers around the country passing on the principals for a successful retirement. Golab is often asked by national websites that focus on the education of consumers to present his knowledge on the areas of retirement and retirement income plans. Matt is frequently featured in The Wall Street Journal, CNBC, MSN Money, The San Francisco Chronicle, Newsweek, TheSmartRetiree, Burlington County Times and appeared nationwide on ABC, CBS, Fox, and NBC as well as USA Today.

Matt has a weekly radio show where he discusses all aspects of retirement planning, total wealth management, and estate strategies. Through his relationship with Retirement Radio Network experts such as David Walker former Comptroller General of the United States, Harry Dent of the H.S. Dent Foundation, John Bogle of the Vanguard Funds and many more have been heard on his show Income Forever.

Golab is the Author of The Consumer's Guide to Planning Your Retirement: Your Guide to Mental Peace and Financial Well Being. Matt Golab continues to expand the geographic reach of his audience and desires to bring his expertise to a nationwide television audience. Matt emphatically states his mission, “I want to change the way Americans view their retirement. They can succeed (stay retired) regardless of what happens in the market". Contact information for Matt is available at his website,
http://www.aaronmatthewsfinancial.com/

Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Advisor.