I like craft beer. As anyone who is either a beer geek, or even worse has a beer geek in their life, knows, part of the beer geek experience is dealing with scarcity. There always seems to be a recently released, hard to find beer which is just supposed to be great and everyone wants. Often times only the lucky few will obtain the special beer, which they will then either hoard in their "cellar" or share triumphantly with their friends.
One of these beers, which needs not be named, is released every year on Black Friday. This year the stars were aligned, and I was able to desert my family after gorging on turkey and pie Thanksgiving night, then drive to Chicago in the dark with three other responsible Dads and pitch a tent to spend the night in a very cold liquor store parking lot in Lincoln Park, all so I could buy my expensive allotment of this special release when the store opened the next day. After some clearly flawed logic, this seemed like a good idea at the time.
So it was with great anticipation I went to my cellar last weekend to offer a taste of one of the rarest beers in this special purchase lot to my friends as we watched football. The crowd was impressed I even had this beer, everyone offered their tasting glass for a pour. We toasted and sipped.
It was pretty good.
After a few more sips the inevitable question came, of course from one of the wives in attendance, ”so how long did you sit in that parking lot for this?”
So was the beer a disappointment? Not at all; the beer is actually a delicious top-notch experience. But after waiting in a parking lot for 12 hours, and denying myself the opportunity to taste my quarry for two entire months, the problem wasn’t the beer, the problem was, of course, in my expectations. Disappointment was the inevitable result.
So what does this have to do with money? Well, as a constant observer of the financial markets I’ve observed a fairly recent change. What was a stock market built on reduced expectations, has over the past 12 months become a stock market which is quite frankly raising the bar and beginning to expect a lot.
In the years following the financial crisis economic expectations in the US just kind of limped along. In the eyes of investors, sub-two percent economic growth was better than no economic growth. As long as corporations created profit growth it didn’t matter if the growth came from cost-cutting or increased revenues. As long as we weren’t going backward, we were moving forward.
After nine years of a bull market in stocks, however, stock prices now reflect great expectations for what may come next. While over the past few years two percent economic growth may have caused a sigh of relief we weren’t slipping into recession, I believe it will take consistent growth over three percent to keep investors happy going forward.
And while corporations were previously rewarded for getting lean and keeping the lights on, investors will be expecting true innovation and revenue growth going forward.
So are these upward expectations a problem? Not at all. They do favor certain investment strategies over others, and are likely to lead to higher volatility, but the increased volatility and higher expectations may actually be the secret sauce to drive markets higher.
If, of course, the economy tastes as good as we hope it will.