Markets up again? What’s up? «
The markets are up yet again causing the gloomy forecasters to wonder
“What’s happening??!! Has the world lost its mind?”
No, actually what’s happening is earnings are coming in better than many analysts had expected and this is driving the markets higher. Additionally, Europe looks as if it might actually do something about their problems which is a welcome breath of fresh air.
The market is based on expectations and when gloom overshadows actual results, you tend to have an oversold condition. It’s our belief that this is the current case and has been for some time. For that reason, we have been a fairly solitary voice saying that we think the selling was overdone as long as regulators did nothing excessively destructive to ruin investor confidence. We expected the markets to stabilize and even move forward. And that is what is playing out now.
And what about form here going forward? Look for Europe to continue to struggle as they address their trillion dollar problem. We believe the United States will likely grow at a slower pace. Still, that is not to say that equity markets cannot move forward in a positive way; they can. And despite emerging countries selling off because of concerns about global growth, these markets need to be reflected in portfolio strategies today. One only needs to look at McDonald’s results to
recognize that the global impact of corporate earnings can drive stock prices higher.
Warren Buffett often says when others are afraid, buy and when they are euphoric, sell. We believe this is the time when excess pessimism has negatively impacted investors perspectives about the reality of earnings growth. Don’t get caught up in this negative spiral psychological game (just like you want to avoid the optimism trap as well).
Digest information on a rational basis and take advantage of opportunities as they present themselves even if the mood is gloomy or overly euphoric. Be the rare rational investor and you will be rewarded.