BREAKING NEWS! This is by far the most overused phrase in today’s financial news. Practically every 5-10 minutes it seems as though it comes screaming across the television. The large exclamation point (!) at the end always seems to get everyone's attention. However, it is not what tends to keep it. That belongs to the all important question mark (?). However, the question mark is typically much more subtle. “Inflation rising?” “Tariffs?” “Trade Wars?” The question mark causes many, including the investment community, to feel the greatest fear.
The reason that questions cause the greatest fear is quite simply, the fear of the unknown. Whether you want to believe it or not, the price of a given investment is predominantly based on simple math. That math is essentially, what’s the company worth if you were to sell the entire company (right down to the office furniture) plus it’s future growth potential. The primary reason you see the rapid swings in a given stock is because of the questions surrounding it’s future growth potential. If you take the recent headline concerns of rising inflation, tariffs, or trade wars, the reason the market has sold off is predominantly because it frankly does not know whether those will be real issues, which companies it will effect, or to what extent it will effect them. Hence, the larger the question mark grows the longer the market will experience a selloff. Conversely, these question marks are the very reason that stocks have historically given you a greater return than a CD (certificate of deposit) at your local bank. The larger the question mark the greater potential for return. The key to realizing those greater returns is being patient enough for those question marks to either disappear or turn into periods.
Finding Periods
In my previous piece, “The Scariest Moment,” I wrote, “From 2010-2016, we have seen the market correct by more than 10% during the year, in 4 out of the 7 years. In fact, in 2 out of the 7 years, we have seen the market correct by more than 15%.“ Thus, what we have seen so far this year is normal. Historically speaking, each time a question mark would arise, sparking a market selloff, it was promptly followed by a “period.” Those “periods” usually come every year in January, April, July and October. These are the months that a majority of the publicly traded companies will provide a report on how their respective company is doing. In January, we saw the stock market rally 5.6% on the fantastic news that companies were reporting. I believe that this coming April will not be any different. Unemployment is testing record lows. Most publicly traded companies have seen record profits. Consumer optimism is at record high levels. The United States and global economy continue to show solid growth. By nearly every objective measurement the economy is strong and continues to grow.
Many of the most well known companies will be reporting their earnings beginning the week of April 9th. I believe that most companies will be reporting growth rates at 10% or higher. As this occurs, the various questions that are on everyone’s minds will begin to fade. Furthermore, the realization that our economy and businesses are continuing to experience significant growth will set in. This will remind us that the profitability of a company determines it’s performance rather than the “Breaking News!?” of the day...Period
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
