Markets have had a lot to think about lately and we've seen some sideways choppy results over the last few weeks. I think it is important to focus on long term goals as nearly anything can happen with stocks in any given month, quarter, even year. More explanation below…
- Earnings – one of the main reasons that the market has struggled for a couple of years now is that we are now 5 consecutive quarters of earnings declines. Stocks typically follow earnings so with companies earning less, stocks have followed suit with many individual stocks still down 5, 10, 20% or more from their 52 week highs. The good news is that last quarter, even though earnings declined year over year, they increased over the prior quarter. So I believe our “earnings recession” appears to have bottomed and is starting to improve. This is largely due to increasing oil prices which reduces the drag from energy companies, and a decreasing dollar which reduces the drag from US exporters. But increasing oil prices are a double edged sword because while higher oil prices are good for energy companies, they are bad for transportation companies and consumers who will both spend more on fuel as oil prices increase. Oil has really been fluctuating lately and that has led to a slight increase in volatility. Oil reserves are also rising dramatically which does not bode well for oil prices in the near future.
- Fed/interest rates – another headwind besides declining earnings is a very uncertain Fed. Are they raising rates? Are they not raising rates? Everyone is guessing. Rising rates are good for the financial sector. In fact, earnings would improve if the financial sector started doing better as this is one of the biggest market sectors. However, rising rates are a double edged sword because as rates rise, companies and individuals are not inclined to use credit as much. So certain companies like financials will benefit from rising rates, other companies like utilities, real estate (REITs), and automotive tend to be hurt by rising rates.
- Seasonality – another headwind we have at the moment is seasonality. The August-October time-frame is typically one of the weakest periods for stocks dating back over the last century. Many corrections have occurred during this period. But I believe it's not necessarily wise to just sit out during this time. Right now we have minimal signs of recession, the economy keeps chugging along, and earnings seem to be improving.
- Election – election years tend to not be great years for the market. The market doesn’t really like uncertainly and elections are inherently uncertain. I think as we get the official results of this year's presidential election, or as we get closer and closer and people anticipate the official results, this may be a stabilizing factor for the market.
So bottom line there is a lot going on. Estimated future earnings, an uncertain Fed, seasonal weakness, and a presidential election have all caused the market to lose a little momentum lately. Investors should focus on long term goals as short term variables sort themselves out.
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