What’s wrong with the market?
So far this year, the market has been struggling. Up 300 one day, down 300 the next, it can’t seem to get its sea-legs. If you watch too closely, the volatility will make you sick. What’s wrong?
Two words: the dollar, and oil. A strong dollar may help American tourists plan European vacations, but it’s tough on folks who earn cash overseas. Overall, earnings expectations for companies that earn most of their money in the US are flat. But for firms that get more than half their income from overseas, expectations are that profits will fall by 12%.
Then there’s oil. Falling prices have been a blessing for consumers, but they’ve been a challenge for the energy sector, especially highly-levered exploration and production companies. Earnings expectations for next year are half of what they were a year ago.
If you take those two factors out, things don’t look so bad. Ex-energy, companies in the S&P 500 that get earn most of their money in the US should see profits grow by 6%, and sales should be up 4%.
That’s a little like saying that if we had some ham, we could make ham and eggs, if we had eggs. Pulling sectors out of the market tells you what might have been—not what is. But nothing lasts forever. The dollar will eventually stabilize, as will oil prices. It’s helpful to know that when that happens, the rest of the market looks healthy.
The market is always in transition from the last reality to the next. Sometimes shifting currents make for choppy seas. But with a good compass and a sound ship, you should be able to ride the waves.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!