For those that have been watching the market gymnastics over the last few weeks, I am sure there a lot of questions as to the cause(es). Anytime the market goes through some rough patches, there are many proclaimed experts that weigh in on the “chicken little” scenario and predict the coming stock market collapse. The facts are that they get this forecast right about one out of ten times, if that often. Two of the issues that are impacting the “nervousness” of investors are: 1) We are finally accepting the fact that interest rates are on the rise, and those increases have been slightly more than had been previously anticipated; and 2) The uncertainties with the potential trade war with China.
Regarding interest rates, the Federal Reserve has a very difficult and delicate job of finding the right balance to support continued economic growth and keeping inflation in check. Raising interest rates too much and the economy can be pushed into a recession, and not enough can cause inflation to heat up. At the same time there are significant forces attempting to influence them on which direction to take and how quickly to do so.
The good news is that the economy is performing well, and the increasing momentum continues to create positive results. With unemployment at record lows and household incomes on the rise, it creates a self-reinforcing business cycle. What you don’t hear often enough is that corporate profits continue to rise, and the numbers are at record levels every quarter. The market “bears” (wrong more than right) don’t seem to understand this dynamic, and here are some facts to support the current environment. There are several market darlings (not all as of late) that are referred to as the FAANG stocks. They are Facebook, Amazon, Apple, Netflix, and Google, and they all are trading at relatively high multiples; and they have had an over-weighted impact on the market. Removing those stocks from the S&P 500 brings earnings to 13.3 times earnings, which is a rather low valuation. We believe this trend will continue until some significant economic imbalances occur, and with the current momentum it will take time for there to be a significant swing. As always that day will come, but we do not see that on the near-term horizon.
It is unfortunate that bad news seems to be the preference of those that generate news, and this should not be “new news” to anybody! However, we do seem to pay more attention to it when we have the volatility we have seen in recent weeks. The potential trade war with China is significant, and once again there is a delicate balance between pushing tariffs too far while trying to protect America’s interests. With my background and experience in manufacturing and consumer products, I know first hand that we have not been operating on a level playing field with China for quite some time. Their blatant disregard for our intellectual property rights, and their desire to dominate various industries have led to some very unfair trading practices. I applaud our current administration in their efforts to level the playing field; however, this is not without some short-term risk.
There is a lot of “noise” out there and sifting through it can be a challenge. As a result, the market is coping with a significant amount of fear, and we encourage you to not be unduly influenced by fear or emotions, as they have proven to be the downfall of most investors who lack discipline.
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. All indices are unmanaged and may not be invested into directly.