The truth is that nobody knows with any real certainty how stock markets will perform tomorrow, next year or over the next decade. This degree of risk is what creates potential profit and different investor strategies and views. Be honest, when was the last time you looked at the long-term investment picture with concern? When was the last time you looked at the short term investment picture with concern?
Short-term pain long-term gain
It is highly unlikely you have looked at the long-term investment picture and not had a modicum of hope for the future. We have all seen the graphs, stock markets outperforming other assets in the longer term even if short-term the picture can be mixed. On the flipside of the coin, whether you are investing in the UK, Europe or the USA, there is more than enough scepticism and concern out there to put you off investing in the short term. So, surely we should all be focusing on the longer term and riding the short term fluctuations?
There will be some occasions where short, medium or long-term concerns about a particular area of the world may prevent you from investing today. One example might be Brexit in the UK and Europe. However, even this potentially game changing situation will be rectified to some extent in the short term.
Those who invest in stock markets are well aware that investors detest uncertainty and welcome clarification. Even if, in this example, there was a no deal Brexit, markets would simply realign and reposition investment ratings against the new scenario – a short term hit perhaps. The longer the uncertainty goes on the more chance investors will eventually decide to bank a profit and sit on the side lines. This short-term ripple of profit-taking can very quickly become a torrent.
Stock markets, expansion and government funding
We often forget that private investors look to the stock market for their long-term financial future but institutional investors and governments dictate the markets. If there were no stock markets or money markets then companies and governments would find it very difficult to raise funds for expansion and refinancing. The best way to describe a stock market is an “information exchange” whereby actions taken by investors, companies and governments dictate the future direction of markets. This includes both public and non-public information (often referred to as inside information) because whether the authorities like it or not these two elements do move markets.
Money markets are also used on a regular basis by central banks around the world to indicate their thoughts for the short to medium term. A simple tweak of an interest rate can prime markets for a rise or fall in the short term. These are very powerful yet subtle signals that banking institutions, governments and companies can give to investment markets.
In order for governments around the world to be re-elected they need to instigate a feelgood factor for individuals and companies. They need to create an environment in which everyone seems to benefit. As the cost of living increases so wages need to follow suit, as wages increase, prices need to follow suit, and the vicious circle begins. Every now and again we will see some investment markets collapse but all this really does is rebase valuations to those of previous years and then the cycle begins again. The key to long-term investment is to spot a change in an investment scenario, the prospects for a company or perhaps funding issues for a particular government or country. We live in a world where nothing lasts forever, companies cannot dominate their markets in the longer term and competition is rife.