It’s my favorite time of the year.
And, no, I am not writing this in December.
The time when most publicly traded companies release their quarterly earnings.
Will this season push stocks to new all-time highs… or will it foretell the long-awaited recession.
Let’s find out…
The Good, The Bad, And The Ugly
Let’s start with The Bad and The Ugly since that’s what you’ll be hearing most about in the news.
The S&P 500 is once again reaching toward the elusive 3,000 mark. The last two times this happened, the market dropped sharply. The first time by 12% and the second by 20%.
Circumstances haven’t improved much since. Interest rates are as high, the U.S.–China trade rift is ongoing, and concerns about a global economic slowdown persist.
I expect investors to be cautious and to lock in some profits in the coming weeks… which should translate to increased volatility.
Furthermore, quarterly earnings for the S&P 500 should decline for the first time in nearly three years, due to a decrease in world trade. The market is fully aware of this fact. Nonetheless, I expect it to be extra sensitive to unfavorable macro events such as additional tariffs or weak economic data.
Now… The Good.
One vital investing lesson I’ve learned (courtesy of the great Ray Dalio) is that, “The world wants to be long.”
The bull narrative still dominates on Wall Street, and I think it will continue to do so throughout 2019… even though we might see some slipping and sliding along the way.
China and Europe, which suffered from negative growth in 2018, are now bottoming out. I think this will fuel the markets and re-accelerate the global economy in the second half of 2019 and the beginning of 2020.
Moreover, I don’t see declining earnings translating necessarily to trouble in the markets.
First, there is a decent chance first-quarter earnings will be positive. Analyst estimates are generally conservative, and most companies beat them. On average, the surprise upside is around three percentage points.
Second, earnings have declined many times in the past. And, each time, even if the market fell, it rebounded right away. The last time this happened was early 2016.
There was no recession on the horizon.
Don’t Watch This Market Too Closely
Earnings seasons always cause a rise in volatility. And, with the S&P 500 reaching again for an all-time high, this one promises to be even more turbulent than usual. I won’t be surprised to see another substantial correction before this 10-year bull market moves on.
The best course of action right now is to keep calm and carry on.
We humans are loss averse. We feel loss twice as strongly as an equivalent gain. Therefore, in times like these, when volatility is likely to increase, as it is very likely to do this earnings season, you shouldn’t look at your portfolio every day. If you watch too closely, you might be tempted to close out positions just as the market is about to turn around.
Meantime, if you’re still on the sidelines, wondering if this is the right time to invest in the market, remember, as the Chinese say: “The best time to plant a tree was 20 years ago. The second best time is now.”