Earnings Season Begins With Stocks Pummeled On Rates, Fed!
“Good timber does not grow with ease. The stronger the wind the stronger the trees.” Thomas S. Monson
One of the really great things about living in the world today is the ability to stay in contact with old acquaintances and friends, obviously through the use of technology. Facebook, Linked In, Twitter, Snap, and others provide all kinds of tools to do so, in case you were not aware. The reason why I bring this up is occasionally, when I have a spare moment, perusing Facebook to see what activities others are up to becomes interesting. Maybe you have come across a similar situation where an old friend posts something they do which is just completely off the wall. I mean, way out there, like they travel to Russia wearing a rainbow tie dyed t shirt, or they get tattoos on every part of their body to signify their undying love for a pet. Well, people do crazy things, and they do them for all kinds of reasons. I bring this up because in the stock market this week, the investment world went a little bit cray cray. If you have any experience in the capital markets, you know that these types of situations happen frequently, so when there is a period of calm and you don’t have irrational selloffs, you wonder when it is going to take place. Meaning, it isn’t a question of if, but when? Well, we got our answer, and you could kind of see it coming a little last week. So what are the reasons for the drubbing of stocks?
First, the most common thought is the normalization of interest rates and no indication by Federal Reserve Board Chairman Jay Powell that he has any intention of slowing down the return of the Fed Funds rate to something approaching historical levels, say 4-6%. On the Chase earnings conference call, Chairman Jamie Dimon mentioned he believed that rates are headed to 4% or more a lot sooner than most observers believe. You know who brought up his opinion on the path of interest rates and how nuts he thought Mr. Powell was for continued tightening. Christine LeGarde, Chairwoman of the IMF, came to Mr. Powell’s defense, and you would have a hard time finding anyone who thought the Fed Chairman was anything but extremely competent. The lingering trade dust ups between the United States and China, in the form escalating tariffs by each party, went into effect this week and some companies are beginning to mention the higher input costs on their conference calls. Volatility in the currency markets, especially in emerging markets and Asia, has been an ongoing reality for the last six months. The higher than expected budget deficit in Italy, along with how Brexit does or doesn’t get resolved, has the investment world questioning the stability of the Euro zone, yet again. Finally, I should mention the valuation of the largest market leaders in the United States, you know, the Amazon’s and Netflix’s of the world, trading at extremely rich multiples. All of this information has long been in the market, and alone, none of it would be something that would cause a 5-6% decline in two sessions. Yet, before recovering some of it on Friday, many stocks have been beaten up pretty hard. It leads to the next question, which is, how should we be looking at things now?
In retrospect, the six month period between 2008-2009 when the market fell nearly 50% proved to be one of the best opportunities in the last 100 years to buy stocks. The current situation is nothing like that, with the economy growing at 4% plus rates, inflation muted, banks with surplus capital, and corporate earnings strong. As an example, Chase earned eight billion smackers, Wells Fargo six billion, and Ci ti nearly five billion. In three months. Next week, we will hear more from corporations, especially in the tech sector (Netflix and PayPal). For most investors, a list of five to ten companies that you believe in, especially with respect to their market position and ability to grow, is a good starting point. The hard part is overcoming the bright red screens to step in and buy when the media and sentiment are saying, ‘It’s the big one, the beginning of the end.’ There used to be a show called Sanford and Son’s where an old man, played by Redd Foxx, would pretend as if he was having a heart attack for any kind of reason, and it would be all over for him. Of course, it wasn’t,and everything turned out OK at the end of each episode. As you get older, you learn the world can only end once, so if that doesn’t seem like a strong possibility, and from my perch, it doesn’t, pick one or two companies you believe in and take a good hard look. The market may give you an even better chance over the next few months, and if so, great, you will just own more of what you want at lower prices. I suspect that three years from now, you won’t even remember what took place the last week.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.