I thought the title would be appropriate based on what has happened in the market the last few days. Here are a few things to keep in mind when trying to process market days like we just had.
What drives the economy or the more technical term, our Gross Domestic Product (GDP) (which is the sum of all goods and services sold in the US)?
1. 70% of GDP is driven by consumers, that is you, me and everyone buying stuff. At the super market, the auto mall, at the appliance store, at the gas station, online etc. Have you or your family, friends and associates been cutting back on spending? Most likely not. I haven't.
2. 30% is business to business sales. Another words bullet point 1 is "retail" and this second bullet point is "wholesale". Who do wholesalers sell to? Ultimately retailers, right? So eventually there has to be a consumer in the mix somewhere. Last I checked we are not yet selling to aliens and frankly that would still count if it was a US good or service.
The market is an advance indicator of the economy. Is the economy doing poorly? Do you know people who are concerned about losing their job? Are people you know cutting back on their expenses and "tightening their belts"? Or do people you know seem to be going out a lot, traveling and not worrying to much about expenses? Are friends, family and other people you know making large purchases? The latter behavior would suggest that people are spending money without too much worry which is good for the economy.
What drives the daily market?
1. Recent headlines
2. Conjecture
3. Emotion
4. Computers
Does that make sense to you?
Here are a couple things to digest. Friday the following were reported
- Chevron and Exxon both missed earnings expectations fueling concerns about the energy sector
- Apple, Alphabet (Google's parent) and Visa reported earnings but some part of each company's report was not what the market wanted. My translation, people think that the economy is not doing as well as they thought???
- Nonfarm payrolls (all the rest of us working stiffs that don't work on a farm) reported a higher than expected number AND there was a .3% jump in average earnings leaving earnings (wages) up 2.9% year over year. 2.9% is considered pretty good. My translation, oh dear, because people are making more money, inflation is increasing. When inflation increases the Federal Reserve raises rates. When they raise them too much, companies borrow less, the economy begins to slow down and the market falls. My observation, the key question is when will all this happen? Next quarter? The following? Two years from now? I think it will take awhile.
- Interest rates are rising. See my explanation thread about inflation in the bullet point above.
Each of the four bullet points above involved elements from points 1-4 under "What drives the daily market", meaning recent headlines (there has to be something to start all this), conjecture (obviously there were a few people trading in the market that thought the economy was not doing well), emotion (uh oh the market is really high so I need to sell out or it's finally going to crash) and last but not least, once all this happens, the computers kick on and sell too.
What drives the market over the long term?
1. How well publicly traded companies are doing and how much we as consumers buy from them.
2. A little conjecture - This is a factor with some companies that are expected to have higher growth potential over the long term than other companies.
3. A little emotion - I had to add this because isn't conjecture a form of emotion?
To sum up, what has gone on in the past few days is a short term blip and not necessarily a reflection of the true value of the market or what is going on in the underlying economy. I reveiwed all the stocks that we watch today. The future earnings projections by analysts relative to the stock's price close as of the end of the day Monday, still shows most of their ratios are lower than they have been over the past 5 years according to Morningstar. The lower the future ratio (don't worrying just 1 year, nothing really crazy), usually the better for the stocks in the market. That does not mean that some underlying factors won't change over the 3 to 6 months.
That's all for now. I should mention that the Crystal Ball is still broken so much of this is my opinion!