Stocks Crushed Again On Earnings, Fears of Slowing Growth!
You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." Peter Lynch
When you are a kid, it seems like you have all the energy in the world and can play for hours. Many children do, and you can put me in that camp. As you get older, lets call it the teenage years, exercising is probably not as fun, except for the activities you naturally enjoy. When you become an adult, for many people, allocating time each week to get some exercise is difficult, and the actual act of some kind of recreation can be painful at worst, and very strenuous. However, in combination with a well balanced diet, if you want to be healthy, exercise is a crucial part of what it takes. I mention exercise because it is very similar to having an approach to investing that not only tolerates and understands market declines, but find them useful. How are they similar to exercise? First and foremost, enduring market declines is painful if you are a long term owner of stocks. The value of what you own decreases each and every day, and in some cases, it happens for days, weeks, or months at a time. It is also the case that individual stock declines are painful as well, and over the last twenty years or so, the volatility of owning individual stocks has only gone up. Using this week for some examples, prominent companies like Caterpillar, 3M, Amazon, and Google saw their stocks go down 8-10% after their earnings report. Believe it or not, I have experienced many situations worse than this, think 10-20% in a day, and it can be more extreme, call it 20-40 or 50% in a day. Clearly, these incidents are not fun as an owner of the specific stock. It is also why it is important to view these situations within the plan of what you are trying to accomplish. In most cases, investors are trying to grow the value of their assets at some point in the future, usually five years or more. Within this context, today is not the critical moment, and five years from now might not be either. Historically, we know that markets go through corrections a few times a year, anywhere from 10-20% at a time. Over the last month, we have experienced it, especially if you own anything on the NASDAQ. So, like knowing that exercising might not be pleasant but still doing it because it is necessary to be healthy, corrections and down markets are seen as part of investing. Just as important, given that the priority for most people is a long period of time, the selloffs present opportunities to finally buy pieces of businesses you want to own. You don’t need to own every business, not should you want to. Each person has their own idea about what they believe qualifies as something that constitutes a superior business. A volatile week like the last one certainly was not fun, but there are probably plenty more chances to buy something you wanted than there were prior. If you are correct in analyzing the business and its chances over the long term, it may wind up being a really healthy thing for your portfolio. Just like exercising.
As for what transpired last week, oh boy, you don’t have to look very far to find reasons to explain why investors were nervous. On the earnings front, 3M and Caterpillar badly disappointed in the industrial space, as did Texas Instruments and AMD in the semiconductor chip area. Obviously, the big news was Amazon and Google having slightly less revenue growth than expected. Yesterday morning, with third quarter GDP coming in at 3.5%, there are concerns about slowing global growth as that GDP number is down from 4.2% in the prior quarter. In combination with the poor numbers in the industrial spaces, as well as lower new housing numbers and the bad chip news, plenty of investors see the economy slowing down, even predicting a recession for 2019. In decomposing the GDP numbers, consumer and government spending were quite strong while business investment lagged. Not all the news was bad as Intel, McDonald’s, Comcast, and Expedia posted solid numbers. Still, the mood is non-forgiving as results, guidance, and pipelines are all analyzed for any possibility that a business is not faring as well as Wall Street wants. All you have to do is look at Amazon and Google to see companies that posted great figures but had their stocks pummeled. Of course, those equities have earned big valuations over the last decade, so don’t feel bad for those shareholders either. In the oil markets, with sanctions starting on Iran in less than ten days, everybody’s favorite Middle Eastern country, Saudi Arabia, indicated they will pump as much oil as needed to makeup for whatever the loss is from Iran. Along those lines, China indicated they will honor the US sanctions, while Russia’s largest producer, Rosneft, sees only more production in the future. The largest oil companies will report next week, as will Apple, which will be a highly scrutinized figure.
Politically, with less than two weeks to go before the elections, it is a full sprint to mobilize voters to get out to the polls. If you are like me, those 8 pm or later phone calls cannot come to an end quickly enough. Still, the important question is what happens in the House, Senate, and key Governor races like in Florida. Markets will react to the outcome, as they do with earnings results. The key is anticipating possible outcomes and understanding them in proper context, just like the wise Mr. Lynch advises.
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.