Hang in There – This Ride is Getting Wild
January 26, 2018
Thursday was another wild day for stocks, but forget the noise – let’s instead focus on the facts. First, major indices keep closing at new highs even when intraday rallies are erased. And second, the fundamental news continues to be impressive. Even recent pullbacks in certain data points are only natural when so many are coming down from levels not seen in more than a decade.
As of today, 24% of the S&P 500 have reported their fourth-quarter numbers and so far the results have been on fire. But have they been good enough? The market is in the midst of the kind of rally that must be justified daily, and the chorus of bears and doubters will still roar their disapproval and predictions of doom.
The fact is that this market has enjoyed one of the best stretches in history, especially when measured against the backdrop of zero volatility. For many investors, it just doesn’t feel right to expect equity futures to be higher and stocks to bolt out of the gate each morning like thoroughbred racehorses.
I understand that part. How markets act during short-term stretches can be influenced by many things often having nothing to do with actual business fundamentals or the economy. That’s why this earnings period is so critical. Numbers and guidance must be robust, and so far they definitely have been.
- Revenue has beaten the Street 81% of the time at a blended rate, which is above the historical average. Top-line momentum is a great proxy for the economy and consumer confident.
- The earnings picture is just as impressive. Through yesterday’s session, 76% of reporting S&P 500 companies beat the Street with a growth rate of 12%, well above the historical average.
Then there’s the question of whether or not the market is overbought. While economic fundamentals are amazing (both domestically and outside the U.S.), many are calling for a pullback based on equity valuation. There are countless ways to assess value, but the metric most often cited is the P/E (price-to-earnings) ratio.
I like to look at the P/E based on the coming 12 months, in part because the market is a forward-looking barometer and harbinger of future developments. On that note, the current forward P/E is 18.4, which is well above the average of 15.9 but nowhere near levels associated with market crashes. I don’t dismiss that the 12-month trailing P/E is at levels where problems have emerged, but more important to where we go from here is the underlying economy and economic momentum that is only going to strengthen in the near term.
So what’s up with the extra volatility? I think it’s a deliberate attempt to scare investors out of the market. As fresh money comes into equities, there are powerful folks who pull strings – and they understand how to manipulate the emotions of confident people who have waited a long time to jump into the fray.
They know the psychology of buyer’s remorse, and they also know that a large swath of investors currently on the sidelines is going to dive in as soon as the Dow cracks 30,000. They believe now is the time to shake out the weaker hands, hence the wilder gyrations.
Obviously markets go up and down, but I continue to caution you not to be shaken out of the market. Take profits when individual stories change and more importantly take losses for the same reason. But do not allow the “masters of the universe” who have largely missed this rally to buy the dips that are created by people running for the exits.