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In Investing, It Is Not The World That Changes – It Is Expectations

Dear investor, do you still remember what the market looked like just a few months ago back in January? It was a sea of red.

There were endless news reports on the slowdown in China’s economic growth and the low price of oil. Those were big worries in the finance community. Singapore’s stock market wasn’t spared. In the first six weeks of 2016, the Straits Times Index (SGX: ^STI) fell by 12%.

A mysterious U-turn

But, in a sudden turn of events, stocks started rebounding since mid-February. In fact, the Straits Times Index is currently 2% higher than where it was at the end of 2015. So what happened between January and mid-February, and mid-February and today? Did the world really change so much in the space of four months?

According to my recent observations, China’s economic growth is still slowing down, and oil prices are still 50% lower than where they were just two years ago. Yet, Asian stocks are currently at a four month high. The stock market is no longer in “Armageddon” mode anymore. Why is that the case?

Reality versus expectations

I think investors need to understand that the market is not a reflection of reality. Instead, the market is a reflection of the expectations of reality coming from the many millions of market participants around the globe. And, the relationship between reality and expectations can vary wildly at times.

Over the past four months, we have just witnessed the impact of the appearance of a huge gap between reality and expectations.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any companies mentioned.