Expectations are tricky things

Last Thursday, the market was sent tumbling after the Labor Department's weekly jobless claims report came out worse than expected, with 500,000 Americans filing for first-time jobless benefits versus analyst expectations of 480k.

Following historically bad home sales data--both for existing homes and new homes--early this week, analysts revised their expectations for jobless claims, with a consensus of 495k instead of 480k for this morning's report. The actual number beat expectations with 473k initial claims, immediately sending the market higher (please ignore the fact that the rally seems to be failing; it's the initial response that I'm focusing on).

This market bounce came despite the fact that the number fell in line with last week's estimates, and that the two-week total of 973k came out to average greater than the original 480k per week expectation. In fact, with this morning's data, the 4-week moving average for jobless claims has now reached its highest point since November 2009.

We often find ourselves in strange places when we revise--or don't revise--our expectations. As a lifelong Red Sox fan, I (like most Sox fans) find myself disappointed by this season, despite the fact that the team's basic performance--on pace for 92 wins--would have been considered a great success in any year before 2004's famous drought-busting championship. Texas Rangers fans, meanwhile, are likely ecstatic about their team's first-place season so far, despite currently having a worse record than the Red Sox.

As individuals, we are typically very quick to raise our expectations, but very stubborn about revising them downward. The market tends to behave in much the same way, which is what makes the last week's market action so compelling. I have rarely seen a market that is more unsure and inconsistent in its determination of what separates "good news" from "bad news".When we don't know what to expect, it's hard to determine whether or not we should be excited.

In general, I think it would be wise for us all to beware of runaway expectations. Following a once-in-a-lifetime tech boom and an unprecedented housing bubble, many of us became accustomed to an incredible level of consumption and economic growth. As we try to muddle through the recession, we shouldn't expect to return to our previous level, or really anywhere close to it--at least not quickly. If we expect that, we'll probably find ourselves like me, a disappointed Red Sox fan desperate for football to start up. Believe me, you don't want to be like me.

[Calculated Risk]