Your 5-a-day: 5 of The Biggest Misunderstandings Cleared Up

‘Wind down’ is not withdrawal but watch negative news flow in the US; treading water is not growth so keep the champagne on ice for Europe; price is not value so beware investor sentiment; falling unemployment is not rising employment so watch the participation rate; and a hiccup is not a correction so keep an eye on an exit…

1. Wind down is not withdrawal

The Federal Reserve’s decision to ‘taper‘ its support is a reduction not a reversal. This means this support will continue, just at a lower level, instead of being withdrawn. A car decelerating still moves forward. There is time for investors, countries, corporates to adjust before support is withdrawn. Although, they may be more sensitive to negative newsflow regardless.

2. Treading water is not growth

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Spain and Italy have officially exited recession since their economies are no longer shrinking. However, their economies are not moving much in the other direction. Spain’s economy grew by just 0.3% over the final 3 months of last year. Italy’s growth is predicted to be even lower; marginal at best. Therefore, the lauded recovery is fragile and although the region is headed in the right direction, keep the champagne on ice.

3. Price is not value

Twitter’s share price doubled in its first month of trading. Is the company that much more profitable? Or did investors initially underestimate its potential? Instead, there is a difference between the price of something and its value. Price can indicate the amount of money someone is willing to pay to buy something. It can be influenced by sentiment – general feelings of fear or greed. Value instead can be quantified by looking at the fundamentals (revenue, costs etc) of the company. (Note: Views on tech stocks can be found via my Twitter feed and on this blog, to follow).

4. Falling unemployment is not rising employment

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A falling unemployment rate does not always indicate less people are out of work. Unemployment is classified as not just being out of work but actively seeking a new job. Those that have lost the motivation to look are therefore no longer counted. Instead, watch the participation rate. It includes both the employed and officially unemployed in calculating the ratio of the labour force to the relevant national population. In this way, it indicates how active the population is, either in work or looking for work. A falling rate is a clearer warning signal.

5. Hiccup is not correction

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A stock market correction is classified as a fall of 10% or more. Less than this is a setback but a greater fall could still be on the way so keep an eye on an exit or hold on tight…

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