When you look at the above picture, what do you see? For most, the eyes are naturally drawn to the clump of dying trees in the middle of the picture. Your mind and eyes are designed to fixate on differences for your protection. If that was a tiger hiding in the jungle, getting ready to pounce, you would be grateful for that natural tendency. However, that natural tendency can also be to your detriment. The most recent example would be when looking at how the stock market performed over the past 6 months. We have seen a tremendous amount of market swings this year and most of them can be attributed to fear of the unknown (i.e. fear that a struggling tree will spread). Too frequently we spend so much time focusing on the individual tree that is struggling, that our peripheral vision cannot see the health of the forest.
The Tree
The trees that are dying in the aforementioned picture look to be struggling for survival. If one had a myopic view of the struggling tree, it would be natural to be fearful or assume that the trees surrounding it are struggling as well. Unfortunately, this was the position many investors have taken over the past several months. Too many were focused on the concern over trade wars, rising interest rates, or inflation. This caused them to make poor investment decisions and sell their investments at the worst possible time. However, I want to be clear, the issues mentioned are real and could cause issues if allowed to metastasize, much like the forest. It is imperative to keep a watchful eye on those trees that are struggling but not at the expense of recognizing the health of the entire forest.
The Forest
In the conversations I have had over the past several months, I frequently explained that the recent downturn would likely be short-lived. Subsequent conversations have mainly been around the question of, “how did you know?” Quite simply, I looked at the economy as a whole. We have been seeing continued low unemployment numbers, increasing wages, and record setting company profits. The forest looked lush and the soil was fertile. I viewed the recent market turmoil as a natural disaster akin to a flood or forest fire. When a flood occurs many of the nutrients from the river bed are deposited in the soil after the water recedes. The same goes for a forest fire. As the trees burn down the soil absorbs all the nutrients of the burnt trees. This soil is now primed for an explosion of new growth. As I have mentioned in previous pieces, companies will be reporting their earnings beginning the week of July 9th, but pay close attention from July 23rd through August 2nd as that is when the bulk of companies will be reporting.
Based on the aforementioned economic backdrop, I believe the bulk of companies will be reporting very good earnings. In fact, it is possible that it will end up being better than last quarter, which was a record breaking quarter. The ground appears fertile and the seeds planted. A little water and sunshine in the form of good earnings should do the trick. Furthermore, It is imperative that we are cognizant of the few struggling trees as to ensure they don’t infest the forest. Nevertheless, I would recommend we keep our eyes fixed on the health of the forest and leaf (I couldn’t resist) the few negative issues in our periphery.
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.
