Ready Fire Aim

By David B. Armstrong, CFA | Feb 05, 2018 | Weekly Market Commentary

Breaking News – February 5^th, 2018.  The S&P 500 is down 7%+ from its high and the streak of 578 days without a 5%+ pullback is over. Now what?

However, it’s all about context.  Today, the Dow Jones Industrial Average closed down 1175 points…making it not even in the top 100 worst percentage drops in history. (H/T Josh Brown @reformedbroker)

This is all about fundamentals versus emotion. Plain and simple.

Facts:

• The economy is expanding at a solid pace – recent data have been strong.
• Fourth quarter (Q4) profits have been very upbeat and the rest of the 2018 outlook is very promising.
• Inflation is low.
• Interest rates have been creeping higher but remain at a historical low level.

This has been the perfect convergence of bullish events and investors pricing in perfection.  This makes the market susceptible and exposed to a selloff…when the storyline does not keep with the script.

The last few trading days have been “Ready, Fire, Aim!”

The fundamentals really do matter…I swear…but not today.  And not over the past few trading days either.

You see, good news is good news…until, well, someone decides it’s bad news.  We are not seeing shares sell off because of fractures in the credit markets and there is no weak economic data.  We are not seeing global central banks signaling massively tighter policy…we are not seeing poor earnings reports and reduced profit forecasts…

This is NOT some big macroeconomic event.

Today’s selloff coupled with the last few down days gets everyone’s attention. We knew a correction would come…the timing, however, was impossible to know in advance.

The past few days crush unabashed euphoria.

But that’s a good thing, because this is investing.  Investing is something you do with goals and time horizons.  This is how it works.

Here’s what the market looked like over the past 10 days and the past 10 years…which one is more important to you?

 

 

 

I really have zero idea when this selloff will end.  ZERO.  No one knows when we’ll bottom – maybe today, maybe after the Dow and the S&P 500 officially move into correction territory, or maybe not even until we venture into Bear Market territory.

I’ve been helping people plan for their retirements and managing their wealth for almost two decades…I’ve seen volatility before and most of you reading this now have seen it before, too. I came into the business in 1999 and I’ve experienced every single one of the selloffs in the graphic below.  Every. Single. One.

However, here’s a monthly chart of the Dow over my career…

 

Bottom Line – Shares Recover.

Bear markets typically correlate closely with recessions. Short term, the data are not signaling a recession.  This is all emotion.

I’m not bearish nor am I scared.  The outlook for earnings remains extremely optimistic. According to Thomson Reuters I/B/E/S, analysts have raised their consensus S&P 500 earnings estimate for 2018 by $9.00 per share over the past seven weeks to $155.26.  And that is mostly on guidance provided over this January’s Q4-2017 earnings season…management teams are psyched about the positive effect of the corporate tax cut enacted late last year. The actual Q1 earnings season starts in April.

Hint…corporations are likely also to report that the weak dollar boosted their Q1 earnings.

Here is how well Q4 Earnings Season has been going so far.  As shown below in a chart from Bespoke, earnings (or Bottom Line) beat rate is at 69.8%. Now look at revenue (or Top Line) beat rate at 74%…it has not been at this level since the last quarter of 2004.

Let’s face it, the latest selloff is not about corporate earnings…it’s the fear that wage inflation is happening and that the Fed will respond with more aggressive monetary tightening.

From there, the fear is that this could cause a recession – either because of tightening credit conditions or by triggering a financial crisis.

Yes, the Fed will continue to raise rates, but it will go slowly to allow the U.S economy to maintain acceleration…the President would not have nominated the new Fed Chairman if his plans were to do anything differently.

As always, have a plan.  If the past few days have convinced you that you cannot handle selloffs, then your plan and portfolio are not aligned with your risk tolerance…probably because you need cash for something over the short-term and you are looking at a lower overall portfolio balance today than 5 trading days ago.  If you don’t need cash over the next 12 months, chill.

Look at the past few days as a fire drill.  Call us if you don’t like how you feel or what’s happened.  We will help you mentally readjust or we will help you change your portfolio.

That’s what we are here for.

Keep looking forward.

-Dave

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