Streetwise for Friday, August 3, 2018
If it feels like stocks are particularly volatile this earnings season, that is because they are. First-day reactions to quarterly results have been more pronounced this earnings season than any time in at least two years.
Among the stocks making up the S&P 500 index, up-or-down swings have averaged 3.9 percent, up from a mean of 3.2 percent in the last eight quarters, according to data compiled by Goldman Sachs.
Yes, many companies have exceeded Street expectations. But what about the forecasts themselves? It may be that Wall Street is having a harder time handicapping corporate profits in the months after the tax cuts went into effect.
Halfway into the current reporting season, more than 80 percent of the S&P 500 companies that announced results have surpassed estimates, a rate that if sustained would be unprecedented since Bloomberg began tracking the data in 1993.
Goldman Sachs strategists say it may be a case where trends in the economy and inflation are making forecasting earnings harder than usual for both analysts and companies themselves. Add in the risk of a global trade war and a Chinese slowdown and nerves begin to fray.
Therefore, even a small downside deviation from expectations in a company’s second quarter earnings report results in a hair trigger response from analysts.
The accompanying spike of anxiety will usually mean a downgrade, followed by a chorus of phrases that often include such words as over-priced, unrealistic, further corrections imminent, etc.
Which of course is a golden opportunity for the soothsayers of doom to rise and further stoke your fears about investing in the financial markets.
Let me save you some time, the diatribe from those claiming to have an insight into the workings of Wall Street never changes. The sky is falling; the economy and Wall Street are headed for a disastrous end.
What follows will be a stream of rhetoric followed by a cornucopia of solutions for, according to the fine print, a “small” cash payment.
And what advice will you receive by subscribing to their wellspring of knowledge? It never changes. Sell everything and buy commodities such as gold and silver, which coincidently they would be happy to sell you, usually in the form of dramatically overpriced coins or bullion.
Before you succumb to the ideas of those who claim to divine the future, you might want to consider the words of Patrick O’Shaughnessy.
He once wrote that the so-called experts are surrogate thinkers. They think so you do not have to. Not only do experts allow us to outsource our thinking but because of a psychological bias known as the “halo” effect, the better known a forecaster is, the greater the confidence in their predictions.
One method of self-defense of course is to improve your self-reliance. And you will need to search for value where others fail to see it.
However, if you are wondering if Wall Street is the Street you should be on, maybe the following will help shine a bit of realistic light into that dark abyss we call the future.
Begin by looking back to the 1970s. Investing back then was a courageous feat when you consider that the Dow Jones Industrial Average fell from 1,072 in 1973 to a low of 578 in December of 1974. That makes any pull-back in today’s market look sort of puny.
The stock market has always had its ups and downs. And every time the equity indexes drop, even in 2008 during the Great Recession, the decline was followed by an upward cycle that took the markets to new highs.
Simply put, that is how Wall Street operates. You can develop as sophisticated a model as you want but in the end the essence of it all is that a growing economy translates to increased corporate earnings and higher share prices.
So, what do you do when an “event” temporarily sends share prices downward? The answer is easy, and you know what it is. Any pullback is a buying opportunity. In other words, seize the opportunity to invest in companies that you believe have the greatest potential to generate gains during the next upturn and well into the future.
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.