Talking Points: Stock Market Collapse?

Posted: Feb 06, 2018 12:07 PM
Talking Points: Stock Market Collapse?

Investors should not panic -- the stock market is in a correction, not a collapse, and this is a buying opportunity.

Yesterday, the Dow dropped nearly 1200 points and is off 8.5 percent from its Jan 26 high. The customary threshold for a correction is 10 percent, and I would expect the current decline to continue through at least that threshold.

The fundamentals under the bull market are strong and remain intact. Coming into this week the price-earnings ratio--the price we pay for profits and dividends when we buy shares--was well below its 25 year average and below its level a year ago. 

Fourth quarter profits were good, and first quarter profits are expected to be even better.

Looking down the road, economic growth is likely to remain robust and this will drive profits higher.

Early soundings for first quarter growth are very good-- the Institute of Supply Chain Management reported very robust activity in both the manufacturing and services sector.

The January jobs report was very good. Wage growth is picking up-wages are up 2.9 percent from a year ago--but factoring productivity growth that is not inflationary. Inflation should be well within the Fed's target of 2 percent for the year.

Oil and natural gas production are up.

About 10 days ago all the investment professionals were saying the market could only go up and money mangers were no longer hedging against a decline in stock prices--they were absolutely confident nothing could go wrong. Those are always the surest indicators something is about to go wrong.

And what did go wrong?

1.The Chinese government has been trying to rein in credit and bubbles in its domestic economy and that pushed down equities in Chinese markets--global markets are connected.

2. Investors confused rising interest rates with rising inflation. The Fed is merely normalizing interest rates for a robust economy, we have no signs of inflation getting out of control.

3. Apple, Amazon, and Alphabet had good but not outstanding first quarter reports. The market seems to expect home runs every quarter, and that is just not possible; however those and a few other tech companies continue to lead the economy and do well.