Streetwise for Sunday, March 25, 2018

This month is the 10th anniversary of the collapse of Bear Stearns and the prelude to the Great Recession. So, it is no surprise that Wall Street is spending an inordinate amount of time developing and honing its next nightmare…one that begins with rising inflation, accompanied by higher interest rates.

At the same time, one of the most prevalent topics in the “what if” game of ascertaining the market direction is the inherent volatility of crude oil prices. Those prices were sharply higher recently with Brent crude reaching $67.42 per barrel and our domestic West Texas Intermediate rising to $63.40.

Key among the reasons for the increase was tension in the Middle East and the possibility of a further decline in Venezuelan output, which is offsetting higher output in the United States.

Venezuelan output has been halved since 2005 to below 2 million barrels per day due to an economic crisis. The International Energy Agency said Venezuela was “vulnerable to an accelerated decline,” and said such a disruption could tip global markets into deficit.

Crude output has climbed sharply in the United States a result of the cuts made by the Organization of the Petroleum Exporting Countries, Russia, and their allies. The production rise has capped oil price gains.

Adding to the headaches facing OPEC is the widening price discount of WTI to Brent crude, which makes it more attractive for foreign refiners to process oil in the United States.

In other words, crude oil prices are being driven by geopolitical factors rather than a growing demand for crude oil and the resulting waves of volatility are breaking on the shores of Wall Street.

Which is just one reason why stock prices fluctuate daily, sometimes by shocking amounts. To the casual investor, these fluctuations can appear drastic and even frightening. Although they are scary, short-term market moves will have no real significance to a quality portfolio.

The equity markets are forward-looking, meaning, they are always trying to predict the future. Of course, such a feat is inherently impossible. Moreover, there is no black magic to successful investing. You need to keep things simple and discard the “cocktail party” notions about future market direction.

What is important to remember is not why the market is moving in a certain direction on a daily or short-term basis, just that it is. Even if it is being done with mirrors it is being done. Forewarned is forearmed.

Economic growth and subsequent stronger corporate earnings will add positive substance and direction to the stock market. However, the remaining three quarters of 2018 are unlikely to see a smooth ride due to a variety of concerns, many of which will be groundless.

Uninterrupted by a decline of 20 percent or more, the current bull market is the second longest ever and only about six months behind the run from October 1990 to March 2000 during the tech boom era. And the gains are expected to continue as global economies are in a period of synchronized growth after years of dealing with the after effects of the Great Recession.

Aiding the equity markets is the on-going stimulus being generated by the tax overhaul, which has reduced what was seen by many as stretched valuations, meaning that the earnings growth picture is now more in line with Street expectations.

For the fourth-quarter, corporate earnings increased by about 15.3 percent, according to Thomson Reuters data. That growth rate is currently expected to be topped in each quarter of 2018, highlighted by earnings growth of 21.9 percent in the third quarter. The problem comes in 2019 as corporations try to exceed their 2018 results.

My key concerns are the possibility of an overheating economy, primarily from higher wages, resulting in an inflation picture that forces the Fed to a more aggressive interest rate posture, thereby derailing to a degree the current bull market. A global trade war would also debilitate the markets. If those concerns fail to materialize, this bull market certainly has room to run.

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.RuddReport.com.