After a huge year in 2017, the market took off like a rocket in January. Now that rocket is coming back to earth. Had I told any of our clients that in early February that the market basically would be flat for the year, I believe most would have taken that as good news, considering the year we had in 2017. However, it doesn’t feel that way when we go straight up then come straight back down.
I have said this many times, and likely will say it many more times: Those who trade in markets must be terrified. Fortunately for our readers, that is not what we do. We invest in companies. So how are companies doing?
JP Morgan reported Monday morning that revenue growth for S&P 500 companies is growing at 8.38 percent. They expect 20 percent earnings growth for the quarter. FactSet, an investment data service, tells us that half of companies have reported their fourth quarter 2017 results, of which 75 percent had better earnings than expected, and 80 percent had better revenues than expected. If that 80 percent number holds, then that would be a new record. We don’t hear much about those records, though.
Of course, if companies are doing well, it means that the consumers who buy their goods are doing well. That means the economy is doing well. In fact, all the economic data has been good – too good, according to the short-term speculators who are driving this dip. The economy is so good that interest rates will rise and the Fed will put a kibosh on the stock market party. There is just one problem with that theory.
Stocks, over the long haul, rise with interest rates. Higher interest rates mean stronger economic activity. Like everything which is driven by the masses, markets tend to overdo things. It is when interest rates peak that stocks tend to fall. We are a long way from that point. This is not the beginning of a bear market.
Stocks do not go up in straight lines. We have been saying that a correction was in order for some time now, and that when it happened it would actually be a positive thing for the longer haul. Well, now it is happening. It may continue for a short time, or it could be over tomorrow. That is why trading in markets is, in our opinion, a fool’s errand.
How do we cope with this volatility? By knowing what we own and why we own it. That can be harder than it used to be as the day traders have been replaced by computers. The computers create short-term moves that are just ridiculous. It becomes hard to keep in mind that short-term moves are exactly that.
What matters in the long haul is: how are the companies doing that I actually own? By keeping focused on this, prudent investors can not only avoid the emotional mistakes that come from focusing on daily or even intra-daily movements and instead use volatility as an opportunity. This is not a time for panic. It is a time for shopping for opportunities.
Chuck Osborne, CFA