I’ve found that one of the main reasons for big disappointments is nothing more than starting with too high of expectations…
Something get’s overvalued or a certain outcome is expected to come too quickly. And when that doesn’t happen, even if the result is still positive, there can be overwhelming disappointment.
And this is where disappointment can mean losing a big chunk of money if you’re not careful…
Let’s say you’re a really good basketball player and you’re entering a shooting competition. You will get 10 shots, and will be paid $100 for each made basket.
In preparation for the contest you hired a shooting coach and trained quite hard. At the end of training, you were making 80% of your shots.
You then enter the contest and make 6 of your 10 shots, earning you $600 on 60% shooting while the average person in the contest made 4 shots and earned $400 each.
You performed well above average, but since you expected to make 8 shots, you’re disappointed…
Situations like this aren’t unique to just basketball. They happen all of the time. And when they happen in the stock market, there’s the potential for huge drops that can cost you big money.
That’s why I’m wary of consumer-discretionary stocks right now.
With the price of a gallon of gas falling over 50 cents on average along with a stronger job market, expectations have been for consumer-discretionary stocks to take off.
However, consumers aren’t spending. Despite having more money in their pockets, saving is trumping spending right now.
Meanwhile, discretionary stocks have been flying on the expectation of bigger consumer spending, leaving these stocks (such as McDonald’s (MCD) and Disney (DIS)) very vulnerable.
At this point, we should be looking for 1 of 2 things to happen:
1. Consumers will realize that the gains from the stronger job market and decreased oil prices are real, and they will start spending.
2. Rising wages, rate hikes, or even a continued lack of spending by the consumer could cause a big fall for discretionary stocks.
Obviously, option 1 would be good for this section of the market and people who are invested in it, yet we have to be aware of option 2 as a real possibility…
