Have you ever wondered why, sometimes, it can seem that share performance is at odds with what’s happening in the real world? It’s because the sharemarket is forward-looking, or future-oriented.

So, what does that mean for you as an investor? Read on to learn more.

How it all works

In a nutshell, share prices are driven, at least in part, by market sentiment about what the future may hold. Investors will look through a downturn, for example, to get a sense of which companies are likely to do best in the eventual recovery. Households might only just be starting to feel the impact of a recession, but the share market has often already moved on and is looking at the other side.

Traders will often weigh up investments against forecasts for things like consumer demand, employment and export growth, to decide which sectors might be primed to move first.

As Nela Richardson explains in this piece from ADP Research, it might help to think of the share market and the economy as a dog out for a walk with its owner. The human (economy) sets the route and keeps things moving but the dog (sharemarket) might still stop to investigate something new every now and then. “The economy always sets the pace and direction, but stocks have a mind of their own, with bursts of investor enthusiasm or anxiety along the way,” Richardson said.

Sentiment and speculation

Market sentiment and speculation are as important as the fundamentals of company valuations. If people are worried about what might be ahead, share prices are often softer, even if there hasn’t been a material change yet. On the other hand, when the general population is positive, share prices might pick up even if nothing appears to have happened to warrant a change.

This was seen in New Zealand in 2020 – strong consumer sentiment after the initial Covid lockdowns helped to keep share prices up, even though gross domestic product (GDP) data was much weaker.

Sometimes, what sounds like good news could be interpreted as bad by the sharemarket. For example, when the Reserve Bank is trying to take the heat out of the economy, strong economic data can be seen as a bad thing by investors because it might mean more official cash rate increases as a result. And the same can happen in reverse, too.

Think long-term

Most people invest in shares because they give an opportunity to benefit from the growth potential of companies. So, they will likely take a long-term perspective, assessing a company’s financial health and growth prospects based on what the next five or ten years may look like, not just right now.

Having a long-term approach can be an important part of an investment strategy, allowing you to look through any short-term volatility and focus on the reasons for the investment, and the characteristics that make you think a company should perform over the long run. 

Time for an investment check-in?

Investing in shares can be an important part of a wealth accumulation strategy, but it’s important to understand the risks. If you’d like to talk about your current investment plans and how they fit into your overall wealth roadmap, get in touch with us. We can help you to work through the best options for you.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.