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Market Pulse: There’s always a reason, right?

David Vomund
Market Pulse
David Vomund

The bull market marches on accompanied by a chorus of voices calling for a “correction” of 5 or even 10 percent.

A little profit-taking from time to time is routine as we saw early last week because of the crisis in Turkey, or so we were told. But a closer look shows the Turkey ETF (TUR) rose on Aug. 15 even as emerging market indexes were falling 2.5 percent.

Having our market drop because of Turkey reminds me of the crises with Greece, Iceland, Egypt and Cyprus, where investors made too much of it. Was Greece, with a GDP of $200 billion, going to bring down the financial system? Of course not.

Markets often move unrelated to news or corporate developments. The media can never accept that. Every day’s action must be explained, evidence of a cause notwithstanding.

Profit-taking is to be expected in markets in which traders, rather than long-term investors, play a significant role on a day-to-day basis. Stocks and commodities are good examples. Traders can push stocks around and do, sometimes rapidly. But over the longterm, traders have no impact. Investors anticipating future earnings and interest rates overwhelm the traders and reap most of the profits.

When the market falls I try to avoid the word “correction” because it implies that something is wrong or out of balance and needs to be corrected. No, nothing is wrong or out of balance. Prices reflect optimism for future earnings — all that really matters to long-term investors — and the outlook is good.

If Turkey isn’t the trigger for more than a quick bout of selling, what will cause something bigger?

Some believe surging interest rates would do it, but that’s unlikely. Would Utilities (XLU) have reached a new 2018 high if investors were expecting a jump in rates? Nope.

I am not concerned about rates undermining the stock market. If the Fed continues to raise short-term rates and long-term bonds follow suit that would confirm that the economy is growing at an increasing pace. Good, because profits (and stock prices) also would accelerate.

Defensive sectors like healthcare, pharmaceuticals and utilities have recently performed best. Small-cap stocks continue to outperform large-caps. That’s why broad-based indexes have hit new highs while the Dow and S&P 500 are only near their highs.

The troops are leading the generals. That’s a good sign.

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.


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