Commentary

Commentary (2)

Sunday, 09 December 2018 23:32

Irrational Markets

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Markets are irrational, often run by greed and fear. Now fear is dominating the market; some are dumping the stocks at the wrong time. All economic indicators are pointing positive trend, and there is no recession visible on the horizon. When it rains, it pours. For the past three weeks, markets are sliding downwards. Bear markets never start without recessionary symptoms just like storms never come without the dark clouds.

 

The recent dip has made many nervous, knowing the difference between short-term market jittery and a bear market might help calm the worries. A bear market is a prolonged, fundamentally driven, broad market decline of negative 20% or greater—while a correction is a short, sharp, sentiment-driven drop exceeding negative10%. The difference in the cause is critical. Bear markets have fundamental drivers can be identified as they materialize. Corrections are functions of mass sentiment or psychology. As such, it may make sense to reduce stock exposure if you see significant negative surprise others miss and believe a bear market is underway. Reacting to corrections—however tempting when fear swells—can wreak havoc on long-term returns.

Anytime you hear about the recession, keep in mind a few facts. A drop in average weekly hours, a spike in unemployment claims, a sudden drop in manufacturers' new orders, the narrower gap between the 10-year treasury bond and fed funds. None of these indicators showing signs of caution. Right before the recession yield curve inverts that is short-term rates go higher than 10-year rate. For the past year, the gap has been narrowing between the 10-year bond and fed rate. However, the 10-year rate is also going up along with the fed rate. 

Stronger third-quarter earnings but poor market reaction:

As per the FactSet, to date, 48% of the companies in the S&P 500 have reported actual results for Q3. Companies are outperforming recent averages on the earnings side and performing in line with current norms on the revenue side. Regarding earnings, the percentage of companies reporting actual EPS above estimates (77%) is above the 5-year average. In aggregate, companies are reporting earnings that are 6.5% above the forecast, which is also above the 5-year average. Regarding sales, the percentage of companies reporting sales above estimates (59%) is equal to the 5-year average. In aggregate, companies are reporting sales that are 0.8% above estimates, which is slightly above the 5-year average.

Though emotionally difficult, short-term market volatility is a normal and healthy part of bull markets. The best course of action for investors is to remain disciplined and avoid making knee-jerk decisions that often result in investment errors. Current fears—trade wars, slowing earnings growth, interest rates are old, re-hashed, or misguided and lack material surprise power for stocks. In our opinion,the bull market should continue as still robust fundamentals, gridlocked governments, and far-from-euphoric investor sentiment push future stock prices higher. 

Published on: October 30, 2018

 

Sunday, 09 December 2018 23:20

The 18 percent solution

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Historically the third year of the presidential term has always been good for the markets; even better if it is the first presidential term. Officially the campaign for the presidential election kick starts right after the midterm elections. With the hung congress, and positive economic momentum with reduced corporate taxes current administration has every incentive to kick-start the trade negotiations with our trade partners and start making market-friendly decisions.

Since 1950, the average third-year presidential term returned 16% market returns and 18% from the November of the election year to the middle of the third year of the presidential term. With GDP growth above three percent, we have more momentum to our economy may yield even higher returns.

If we consider only first term third presidential year the average S&P 500 returns were even sweeter, the average returns were 20.37% and median returns were 20 %. Since 1950, the third year returns in the first term presidential year were never a negative one but averaged 20% and the eight months return from November to mid third year was 19%.

In our opinion, given the state of our economy and the growth prospects and business-friendly policies and recent market correction, we believe the probability of getting good market returns are higher than usual.

Written on:November 7th, 2018