U.S. companies are nearly finished reporting remarkably strong first quarter results. Earnings for S&P 500 companies vaulted up by 25% from last year’s figures, a nearly unheard-of jump this late in an economic cycle. Such spikes in earnings may occur coming out of a recession, after earnings have been depressed, but are very improbable in the ninth year of a gradual economic expansion.
So far in 2018, however, the U.S. stock market has not responded commensurately to corporate earnings growth. The S&P 500 Index, as of this writing, is only up 2.3% year-to-date and remains nearly 5% below its best levels of the year, which were achieved in January. Investors had clearly been expecting profit results to be strong and are now focused elsewhere to see if they can spot signs of trouble for the markets as we head toward summer.
Despite the surge in corporate profitability, the list of potential worries for investors remains long. Let’s look at a few major investor concerns.
Perhaps the biggest issue on investors’ minds is a potential trade war with China, which would likely be disastrous for both sides. The headlines about this issue change from day to day and have contributed significantly to the volatility we have seen thus far in 2018. As of now, negotiations are ongoing to sort out our trade disputes and there is little clarity on the path forward.
Geopolitical ructions have also kept investors on edge in recent weeks. Violence broke out on the Israel/Gaza border over the opening of the new U.S. Embassy in Jerusalem, while the U.S. has abandoned the Iran nuclear deal and imposed additional sanctions on that country. Furthermore, the North Korea summit between Kim Jong Un and President Trump appears to be in jeopardy and the Venezuelan economy is collapsing amid the Maduro government’s horrendous mismanagement of the country at all levels.
Oil prices have also spiked recently and now stand at $72.57 per barrel (West Texas Intermediate), up more than $12 so far in 2018. The Iran deal exit and Venezuelan implosion have both been bearish for the global oil supply and prices have risen accordingly.
With a robust and wide-ranging list of worries, should investors be optimistic or pessimistic? At first blush, one might think the list of potential negatives means there is a better than average chance of a near-term downturn in the market. However, investor sentiment is often a contrary indicator, meaning that stocks are more likely to go up when a large percentage of investors are bearish and more likely to go down when a majority of investors are bullish. Thinking back to the eves of the two biggest downturns in the last 20 years (the bursting of the dot.com bubble in 2000 and the bursting of the housing/mortgage bubble in 2008), in both cases investors were widely bullish just as the downturns began. The Wall Street adage that “markets climb a wall of worry” means that there needs to be something to worry about to keep markets moving higher as skeptical investors represent a source of potential demand for stocks. Once optimism is prevalent, there are no more buyers to lure off the sidelines to push markets higher.
For investors, often the best time to worry the most is when there’s the least to worry about.
Please don’t hesitate to get in touch with me if you would like to discuss your portfolio or the markets.