Experiencing the volatility of the past two months has not been fun, particularly if you bought new stock positions between April and September of what has become the worst year for stock markets in 10 years. There has been a lot of doom and gloom in the news but just as we discussed last month, it is during times like these it is best to ignore the inevitable emotion that comes into play, and instead take a look at the data to re-examine our conclusions.

Let’s start with reviewing what we know about 2018 stock performance.

1. First, we know that there is a high correlation between corporate earnings and stock prices (80-85 percent). As earnings have gone up, so have stock prices. And when earnings go down, stock prices have declined.
2. Secondly, we know that third-quarter earnings have already been reported by 476 of the 500 companies in the S&P 500, and — in aggregate — these companies easily beat expectations with earnings growth this quarter of 28.2 percent.

3. The third thing we know is that the stock market moves in anticipation of what will happen, not what has already happened. That said, 2018 was a very good year for corporate earnings, especially with the corporate tax cut at the beginning of the year. 2019 is more normal, with earnings growth expected to be in the single digits. Earnings forecasts are still positive, but the growth rate is lower next year than this year.

For the mathematicians out there, it is the second derivative or the rate of change, that is leading to volatility. Wall Street analysts are worried about the lower growth rate but not that earnings will go negative. When earnings actually decline year-over-year, that is when we have had bear markets, which is when prices decline by 20 percent or more.

4. Finally, the fourth thing we know is that going all the way back to 1928, bear markets have only occurred during recessions.

By drawing on what we know, the market volatility of 2018 looks like the usual back and forth that comes with worrying about earnings, given the impact of the trade war and other factors, but not a recession. Earnings forecasts still are positive for next year and we expect that the stock market will ultimately follow that trend.

At Archer Bay Capital, believe that informed investors have the best chance of achieving their financial goals for the long term. That’s why we are dedicated to offering practical, straight forward financial guidance that is tailored to your unique needs and interests. Contact us to learn more about stock market performance and what it means for your portfolio, or to set up a consultation today.