Ever wonder what it might be like to be an ant walking on the edge of a saw blade? Probably not, but the last couple of months have sure felt like it because of a daily change of sentiment from euphoria to depression as the stock markets heave up and down by hundreds of points. It doesn’t seem like we’ve had two good days back to back in quite a while.
The reasons for the recent tumult have actually changed over the last several weeks. First it was interest rates surging to levels not seen in a few years, higher mortgage rates, and the Federal Reserve increasing interest rates. Then suddenly we weren’t worried about that too much, we were worried about geopolitical issues, like tariffs, possible trade wars with China, and today, as I write this, the focus is on President Trump: his personal lawyer’s office, home and hotel room getting raided by the FBI, and Trump’s taunting of the Russians by threatening to send “smart” missiles into Syria in response to that government’s most recent gassing of their citizens.
Things like this can absolutely spook the markets over the short run. If enough of them string together, it can shift investor sentiment enough that the overall focus changes from the good news of a stable and growing economy to all the bad news. What’s interesting is we had plenty of bad news last year too, but none of it could shake the stock market from its cheery mood. This year, so far, is a different story altogether.
I like to look back at some of the big concerns the markets stressed out about in past years:
2013: Detroit filed for bankruptcy, the US Government Shut Down for more than two weeks over debt ceiling/fiscal cliff battles in Congress, Obamacare’s rollout was bungled, and there was a brief spike in interest rates called the Taper Tantrum that roiled financial markets.
2014: The Islamic State sent shockwaves across the world, big Asian economies faced weakness, another Israeli-Palestinian war, Ebola became a global health crisis, Republicans swept the midterms and gained control of the Senate, and Russia invaded Ukraine.
2015: Fed raises interest rates for first time, terrorism increases, China’s economy slowed, oil prices fell dramatically, commodity prices collapsed, spreading fear in emerging markets.
2016: Stock market starts year with worst start to a year in history, Brexit roiled worldwide markets, for a couple of days at least, Trump’s election initially causes markets to plunge, then skyrocket, hitting 20,000.
2017: You already forgot? Trump-Russia concerns blow up, leading to a special counsel being called to investigate, health care reform fails in Congress, but they pass sweeping tax reductions by year end. The Dow rises 5,000 points.
The point is all of these issues moved the markets, yet today, they are nothing more than footnotes that hardly anyone remembers. The same will happen with all the news swirling today. The fear of the unknown is palpable, especially when anxiety is highest. However, anxiety eventually calms down, cooler heads prevail and then what drives the markets, and ultimately the ONLY thing that drives the markets long term is corporate profits. Stock prices are highly correlated with the growth of corporate profits. In fact, they have shown an uncanny ability to predict the direction of corporate profits about six months in advance. So in March, 2009, when the country was still deeply mired in a deep recession, stock prices suddenly took off higher. Sure enough, by the third quarter of that year, corporate profits had also begun rebounding.
Rather than worry about all the news that none of us can stop watching (c’mon, admit it, nobody can turn away from the DC drama these days), you should pay attention to the direction of corporate profits. Where are they now? In the fourth quarter, 75% of companies reporting results had upside surprises, and 79% of companies reported sales that exceeded expectations, the highest ever recorded. Across Europe, Japan. and the US, corporate profit growth was up 15-17% year over year, and it is expected to be up 17.2% in the recently completed first quarter, according to CNBC.
So go ahead and indulge yourself tn Trump Fever to your heart’s content, but do not confuse that show with your investment portfolio!!