Market Pulse: I’m still in the bullish camp
July 11, 2018
The market turned south at the end of the quarter with the Dow falling 1150 from its June 11 high. So what triggered the selling?
That's hard to say, or maybe impossible to say for sure. Here are four possibilities:
There is news every day about tariffs, trade and sanctions that sets a bad tone for the market and adds more uncertainty. No one is cutting tariffs; several countries are imposing or raising them.
Traders, not investors, determine the market's short-term swings. Traders trade, that's what they do. They don't analyze data and integrate changes real or imagined into positions long or short, or none at all. Profit-taking is routine and often triggers substantial if not meaningful daily moves.
It would be easy to blame the selling on rising interest rates and the prospect of more boosts through next year. But investors are not so sure there will be many increases ahead, which is why long-term rates have not risen and in fact have declined.
The yield on the 10-year Treasury is 2.83 percent. A few weeks ago, after the Fed's boost and talk of more increases ahead, it was 3.02 percent. That shows a lack of concern about rising rates. Utility stocks, considered the most sensitive to anticipated interest-rate changes, have been rising. Stock investors must agree with the bond crowd that rates won't rise far. The Utility SPDR (XLU) has risen 10 percent from its low.
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So which is it? What caused the market's retreat? I say it's a combination — mostly profit-taking, but to a small extent a creeping concern that this might be as good as it gets. The "this" being profit margins, earnings, GDP growth (at least 4 percent in the second quarter), p-e multiples, employment, wage gains, the works.
I'm not worried. The good times can last given the important structural changes we've seen, whether at this pace, a little slower, or for that matter faster, is not the key. Future earnings and interest rates are the important factors for stock prices, and the outlook for both is encouraging.
Selling pressures will come and go, then come and go again for whatever reason. Nothing unusual about that nor should short-term swings be disconcerting for long-term investors. Optimism is a lot more rewarding than pessimism and for many reasons it is still justified.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.