April Market Recap & Managing Expectations

In April, stocks and bonds declined. US small cap stocks went down the most, followed US large cap and international. On a relative basis, bonds performed the best. For the calendar year, US large cap and international stocks are up, while small cap stocks and bonds are down.

Exceeding Expectations

According to the American Hotel & Lodging Association, Hampton Inn was the first chain to introduce free breakfast to their guests. Initially, it pleasantly surprised their customers, who received something beyond their expectations. This led other hotels to follow suit, and over time, free breakfast became standard. Now, almost all hotels provide it. In fact, if the scrambled eggs are undercooked or the oatmeal is too mushy, the breakfast can be a source of disappointment rather than delight. What started out as a positive became negative because even though the actual experience improved, people’s expectations increased more.

Similarly, movements in stock prices are based on investor expectations. Low, or declining prices reflect low expectations, and vice versa. For example, last week Tesla and Meta Platforms (formerly Facebook) reported quarterly earnings. In opposite ways, each stock showed that it is not simply good or bad news that moves the price. Instead, they key question is “Was the news better or worse than investors expected it to be?”

On April 23, Tesla reported sales of $21.3 billion and earnings per share of $0.45. Wall Street analysts had forecasted $22.2 billion of sales and $0.50 earnings per share. This was bad news. So the stock went down, right?

Actually, the next day, Tesla stock opened around 12.5% higher. To understand why, take a look at its performance over the prior three months – the price went from roughly $265/share to around $140/share, a loss of approximately 50%. Once the results were actually announced, even though they were bad, the move in the stock had already happened. Expectations were really low – so low that even bad news wasn’t bad enough to take the stock lower.

The next day, Meta released earnings and the exact opposite occurred. They reported $36.46 billion in revenues and $4.71 earnings per share, while analysts expected $36.16 billion of revenues and $4.32 earnings per share. This was good news. So the stock went up, right?

Instead, Meta stock opened down over 14%. In contrast to Telsa, Meta shares had risen over 56% since January. Investors anticipated outstanding (rather than very good) financial results. Even though the news was good, it wasn’t up to very high expectations. And during the earnings call, Mark Zuckerberg focused the company’s plans to spend large amounts of money investing in new product lines – new information that investors weren’t prepared for.

In markets, just like in life, expectations change rapidly. And stock prices, much like our hotel breakfast, are not based solely on good news or bad. They depend on whether that news was better or worse than what we expected. If you want to talk about how this principle affects your portfolio, let us know!

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