2/5/2018 Riding The Rockies Trading Update

No doubt, the “talking heads” on the financial news channels are scaring the hell out of most individual investors by today’s very volatile market action. Let’s talk about what happened today and what we see looking ahead.

Most of today’s market action this afternoon was caused by ETF trading. Typically shares from ETF’s trade in blocks in the early/midafternoon and that’s precisely what happened today at about 2:30. Sell orders from nervous investors were aggregated and dumped on the market, resulting in a large “whooshing” sound when few buyers could be found to buy their shares resulting in much lower bids.

It appears to us that the market is beginning to put in a bottom and that sellers are becoming exhausted. As that happens, the markets should level out and then bounce. If history remains true to form, we can expect a retest of that bottom and then we should see a resumption of a stock market driven by earnings fundamentals which are very healthy and are expected to show significant improvement in the second and third quarters of 2018.

We think that the current earnings environment is the strongest in 6 years, sales are the strongest since 2006 and analyst’s forward guidance is the strongest in history. It doesn’t get better than this. The environment for stocks is excellent. We think that there will be a bounce and we believe that stock markets will move higher through the year and beyond. It may not come, however, without periodic corrections such as the present.

This correction has occurred almost exclusive as a result of fears of higher inflation. As Strategas’ Chief Economist Dan Rissmiller pointed out this afternoon,

“It is true that inflationary pressures are building but it seems more accurate to say that long-term interestrates are increasing due to expectations of higher real GDP growth. This is, and
will be, an unalloyed positive for stocks until inflationary pressures force the Fed
to tighten aggressively.”

Bond yields today, unlike Friday, declined as investors sought safety in them. The 10-year US Treasury Note, for example, saw its yield move down from 2.85% to 2.70% at the close. This move was, in our view, healthy and was a return to what might normally be expected in these market dynamics.

We view the economy as strong and do not believe that we are witnessing the “end” of this secular bull market.

We think that this is a very good time, if you do not like this market volatility, to consider the use of a principally protected investment which has no market downside risk but which captures market upside. If this may be of interest to you, please give me a call to explore.

Curt Lyman