With the recent market volatility we’re experiencing, I thought it might help to look beyond emotions and hype. You may remember the phrase by James Carville back in 1992: “it’s the economy, stupid.” Perhaps we should also think “it’s earnings, stupid” and “it’s revenue, stupid!” Understanding these concepts can help put things into perspective.
The difference between earnings and revenue
So, how do earnings and revenue differ? Revenue is the total income earned by a company. You may have heard revenues referred to as “top line.” This is because revenue sits at the top of the income statement. Revenue is income generated before expenses are deducted.
Earnings, on the other hand, go to the bottom line of the income statement. This can be thought of as profit earned.
David Lebovitz, in a recent J.P. Morgan article, writes: “while we may have seen both peak economic and earnings growth, an economic recession does not seem likely in the near term and profits look set to continue growing next year, albeit at a slower pace. Furthermore, as the Federal Reserve continues to unwind the greatest monetary policy experiment seen in our lifetime and other central banks hint that they will follow suit, it should not be surprising that risk assets have come under pressure.“
What causes market volatility?
If the economy seems strong and there does not appear to be a near term recession looming, why all the market turmoil then?
Keep in mind that market volatility happens with — or without — a reason. No one wants to see their stocks go down, but it is normal and not the exception in a market cycle. In fact, it’s quite healthy for the markets. Moderate pullbacks happen frequently, even in “normal” times. If an investor doesn’t panic, stays the course, and thinks long-term… they can also benefit from these pullbacks and dips.
What to do after the October market dip
Recent market swings call for antacids and putting things into perspective. The S&P 500 has had a pullback each year by an average of 14% over the last 38 years. In the past 20 years, the best 10 days in the market have occurred within two weeks of the 10 worst days.
Given the overall positive returns in the market despite the volatility, it is clear to see why market timing is not a great strategy. Keep in mind that the talking heads on financial media sources can have a short-term mentality that speaks mostly to traders.
Volatility isn’t always a reason to exit the stock market
Although you may not be able to ignore the media, keep in perspective that their goals are not necessarily in alignment with yours — nor germane to your long-term objectives. The recent volatility should not serve as a reason to exit the stock market. A financial advisor can help to review your plans, too, and make sure everything is in line for your future course.
Remember the old joke where the guy says to his doctor “it hurts when I do this” the doctor says: “Well, then don’t do that!” If watching an over-abundance of financial news and over “Googling” is causing you anxiety… then don’t do that!
November 2018
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
