Streetwise for Friday, August 31, 2018

Despite the tremendous benefits that are derived from the creation of an equity portfolio, the fact that the equity markets have reached record highs appears to be in cadence with an increased fear of the financial markets, a fear that is being stoked by certain prognosticators. Do I detect a bit of mendacity here?

A growing fear resulting from Wall Street chalking up new highs is not logical, especially when it comes in cadence with rising investor confidence, and a degree of underlying greed driven by the higher share prices.

However, both confidence and greed are merely side effects. The rising trend in share prices is directly attributable to corporate performance. Translated that means revenues have increased along with earnings and in many cases dividends.

For a little added sugar, we cannot forget the stimulus provided by the recent tax legislation. This was particularly pertinent to the issue of share buy-backs.

The reduced tax liability associated with transferring funds back to the United States from abroad allowed corporations to use a substantial amount of the funds to purchase their own shares, thereby bringing down the number of shares outstanding.

This in turn raised their earnings per share numbers without any increase in earnings. Yes, it is a bit of financial alchemy.

More concrete evidence of corporate performance and solidarity is evident in some S&P 500 index statistics. For example, during the second quarter earnings for the S&P 500 increased approximately 23.5 percent when compared to the same period a year ago. However, if you exclude the energy sector, that number falls to 20.4 percent.

Approximately 78.6 percent of the companies in the S&P 500 index exceeded earnings expectations. This is above the long-term average of 64 percent and above the prior four quarter average of 75 percent.

An overall revenue growth estimate for the index is about 9.2 percent. If you exclude the energy sector, that number declines to 8.0 percent. Overall, about 73 percent of firms in the S&P 500 index exceeded analyst revenue forecasts, and exceeded the long-term average of 60 percent, and was above the prior four quarter average of 72 percent.

So, what could possibly prevent you from taking advantage of such a situation? The answer is perceived risk and a lack of confidence. Yes, investing means dealing with projections about the future and the ensuing uncertainty. And while risk can be minimized through a prudent and disciplined investment strategy, it can never be eliminated.

Unfortunately, investors often have a skewed idea of risk. To many it becomes an unrelenting fear of losing hard earned profits or savings. Yet, even during the 2008 debacle, the worst financial crisis of my lifetime, the S&P 500 index was down only 38 percent. Look at where the index is today.

While time is not a panacea that will cure all investment ills, the longer your investment horizon, the greater your probability of reasonable success.

Therefore, we can only conclude that the paramount non-quantifiable risk faced by most investors is mass market hysteria. Moreover, it does not take much to start a fire, only a little spark.

One of the greatest minds of all time, Sir Isaac Newton, suffered a financial loss in the South Sea Trading Company bubble of 1720.  Newton was given to say that he could “calculate the motions of heavenly bodies but not the madness of men.”

The madness referred to by Newton is the combination of fear, greed, and ignorance that so often envelopes the investment world. Yet, an environment of ensuing volatility creates investment opportunities for those willing to implement objective, mathematically based investment strategies.

Note to Readers: I will again be teaching Introductory Investment Analysis for the Ringling College’s Lifelong Learning Academy, now called the Osher Lifelong Learning Institute. Classes begin on Monday, September 24 and run every Monday for 8 weeks. Call 941-309-5111 or go to https://olliringlingcollege.org to register.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.