Navigating the Mind Field of Investing Money

The stock market is in charge of everything.

Charles Dow conceptualized the Dow Jones Industrial Average because he wanted to create a barometer of the economy. In other words, the stock market reflected the health of the economy. I believe this held true until the very late 1990’s. Then something changed. Now I believe the opposite is true. The economy now reflects the stock market. The stock market is now in charge of everything. If the stock market is doing well, investor confidence goes up. Consumer spending stays strong. In turn, the economy feels the effects of the consumer. You know the stat – consumer spending accounts for 70% of GDP. In essence, we, you, I, we are the economy. Our government inundates us with ever-ebullient data. The Federal Reserve has become nothing more than a bear market trampoline. Television networks have evolved to essentially promote the stock market. There are cable channels that broadcast market news 24/7. Some journalists have become investment icons as they shamelessly promote stocks day and night. Market pundits are constantly giving their opinions and offering stock picks. To the objective observer, the overwhelming majority of these folks are 100% positive on the stock market 100% of the time. Now, I’m all for being confident and optimistic. However, successful investing must be accompanied by a fair amount of realism. Stock markets and investments go up and down.

It’s kind of like the argument over which comes first – the chicken or the egg. I think to a large degree the information age of the 1990’s changed investing forever. Everyone knows everything at the same time. Now that everyone has access to a computer, everyone has access to news and information that only investment professionals used to enjoy. In addition, television networks carry investment programs that disseminate news as it happens almost instantaneously. In that way, investors react to news events before the economy even has a chance to feel the impact either positively or negatively. No longer do we wait for earnings reports that are released at the end of the quarter. If something happens, investors know it before corporate CEOs can make adjustments. If a company’s stock price takes a sudden drop for some reason, that price drop can affect the company’s reaction more so than whatever crisis initiated the drop in the first place.

Not surprisingly, most Americans now have money in the stock market to some degree. Either we invest through brokerage accounts, 401(k)s, mutual funds, trusts, company stock, or by other means. As we entered the Great Depression of the 1930s, it was thought that far less than 10% of the population had any money in the market at all. Could less than 10% of the population bring down the economy? I doubt it but I’d bet that 50% of us could! That’s the estimate on current stock ownership in today’s environment (from the Securities Industry Association). If investors sour on the market and stocks go into a bearish phase, confidence wanes and spending drops along with investments. The economy sags. If investors boost the markets higher, we feel richer and spend more freely thus supporting the economy. The Federal Reserve, under the leadership of Alan Greenspan, has completely abandoned their original charter and gone into the business of supporting the stock market. The government ‘engineers’ data and formulas to create that data to make the economy seem ever ebullient. This development has not been lost in Corporate America. Corporate America gets away with almost everything for the sake of making the stock market go higher. Would you like a case in point?  

Take the cigarette maker Altria. They used to call themselves Phillip Morris and decided to change the name after some debate as to whether or not their products were indeed carcinogens. Please don’t take this discussion out of context. Altria is, and always has been, an extraordinarily well run company. Shareholders have been rewarded with great earnings and dividends that make the rest of the corporate world jealous. I am a strong proponent of free markets and I firmly support the right of every company to conduct their business for the betterment of their workers and shareholders. In the case of Altria’s main product, cigarettes, every package is printed with a carcinogenic warning that the product does indeed cause lung cancer. This is America and people are free to use whatever products they want to including cigarettes. When it comes down to pure fundamentals, Altria is without question one the best companies in the world. However, they have been the target of lawsuits from smokers who contracted lung cancer after using Altria’s products for many years.

In one of my past newsletters, I wrote about the specific case in Illinois but I think this story bears repeating. Let me give you an excerpt from a previous newsletter that I wrote several years ago: