Since the election the stock market has been on a roll, and even bonds have shown strength. We are just about finished with second quarter earnings reports and we have seen some solid surprises to the upside, a near 10% gain in earnings over 2016. This follows another double digit gain from first quarter, and some estimates have the second half of 2017 coming in with double digit gains. This will help buoy the markets until the earnings cycle inflects to the downside. That may be another two or three quarters down the road, but as always the markets will sniff it out.
But with earnings there must be a strong and bold confidence of investors to take on market risk. Without the courage there is no liquidity, no demand for stock and prices won't rise. It simply means that with strong earnings and stagnant prices, stocks will become values or just cheap, not receiving a premium or multiple that could be deserved looking out some quarters or years.
The confidence investors have carries a long way and is supported by many factors. Chief among them is a strong jobs market, and that has been the case for several years now. Wage growth has been a problem, but in a country of over 330 million people and plenty of jobs available and taken, coupled with low inflation there is often money left over to invest (if not save). Those who took some risk so far in 2017 probably have made it pay off. The bull market continues on.
But when there is a crisis of confidence there is doubt about the trend, even if companies deliver on earnings. Anything can shake one's confidence, and it is often some surprising story or twist that does the trick. Yet, we as investors have been blindsided so often over the past couple of years, faced with the prospect of the long bull market ending, but the buyers continue to step up.
Think about it in 2016 with the early year woes (China, N Korea and Middle East news), Brexit in June and the election in November. Markets nosedived, volatility surged but very quickly buyers came in to scoop up stocks that went down.
These were moments of worry, and let's not forget some of the tragic terror attacks around the world, which would have shaken anyone's soul to the core. investors were able to shake it off and continue to buy the dip
In 2017 the issues around the White House and the Trump agenda have caused some angst, and recently some sharp losses - earlier this year these were good buying opportunities. However, each pulldown - while often bought up by those waiting on the sidelines, is another reminder things can/will change. It's our job to make the adjustment.
Most recently, some uncertainty is clouding around the White House and the Trump Administration, quite a bit of turnover and worry over not getting some of the agenda accomplished. Market players have anticipated some good things to happen but have not priced this in completely, leaving an out just in case some things are radically changed. It really doesn't take much to start a fire, only a little spark.
But while we may have some fleeing the scene, it may be premature. But something to think about: Regardless, if confidence continues to erode so will the flow of capital, and with stock prices up on some lofty expectations, if the money flow slows down or stops, the stock prices will fall - no matter how good the earnings.