The market selloff over the past week has left many pundits scratching their heads. While reasons abound; trade, tariffs, rising interest rates, soft global economy, Italy… none of them are new. They have all been on the horizon for months if not all year. The question that is more appropriate is not “Why?” but “Why now?”.
Every time the idea that this bull market is over comes to the forefront, I have been quick to remind that the bull market is based on one thing, and one thing only. The ability of this economy to continue to generate growing earnings for the majority of companies that have publicly listed stock. Period. Things like interest rates and tariffs do matter, but not in and of themselves. They only matter to the extent that they can impact and reduce corporate earnings. But the economy is affected by hundreds, if not thousands, of events on a daily basis. Adding millions of workers to the labor force has been a powerful stimulant that has offset much of the headwinds. The trick then is to determine the net affect that they all have in sum on corporate profitability. No easy task.
So why now? My guess is that with third quarter earnings season really kicking off today, investors just got nervous that a small hiccup could wipe out the years gains in many of their holdings. No one ever went broke taking a profit. No reason to turn paper gains into paper losses.
With solid earnings today, led by a solid beat by J P Morgan, a bit of rationality has returned. This economy is strong. A recession is not in the cards.
Does that mean more double digit returns for the market? Not necessarily. Zack’s estimates that this years earnings growth will be in the 17% range, dropping to under 10% for 2019. If the Fed keeps raising rates, Europe, Japan, the emerging markets can’t get their economies going, a trade war, maybe throw in a European financial crisis, and the result is that the U S market will be in far more jeopardy if growing at a 9% earnings clip than a 17% rate.
Bottom line: What we have seen so far in October might be the “new normal” for the market in 2019. Are you ready for that kind of ride?
— Bill DeShurko, Registered Investment Advisor at 401 Advisor, LLC