Heard in our office this week:
“What a week! I’m ready for the weekend.”
“Uh. It’s Wednesday.”
I think many people felt this way during a crazy week of volatility in the market. Wednesday’s 800+ point drop in the Dow really rocked investors.
But that wasn’t the only news to make folks nervous. The economic news seemed all over the place as well.
First, President Trump escalated the trade tariff spat with China making a deal seem farther away than ever.
Then the dreaded “inverted yield curve”, a reliable precursor to a recession, became a reality mid-week sparking the Wednesday sell-off. My colleague Jeff Remsburg discussed it in detail on Wednesday.
And just as Q2 earnings season is winding down, The Wall Street Journal reported that analysts have cut their third-quarter profit estimates significantly. According to FactSet, earnings across companies in the S&P 500 will grow 1.5% this year. That is far short of estimates for growth of more than 6% forecast at the beginning of the year.
***But, that’s not to say there wasn’t some good news to help keep everyone confused.
The Department of Labor reported that the number of people who applied for jobless benefits in early August rose to a six-week high of 220,000. That sounds bad but that number is still near post 2008 recession lows.
U.S. consumers are still spending money. Retail sales climbed a seasonally adjusted 0.7% in July from a month earlier, the Commerce Department said Thursday. That news stabilized markets that had dropped like a stone on Wednesday.
Meanwhile, two key business activity indexes that measure business reporting expansion versus those contracting pointed to continued expansion in August. Readings for both the Empire State Manufacturing Survey and Philadelphia Fed Business Outlook Survey were well above expectations.
This was interpreted by many as a sign that the domestic U.S. economy was still very strong, despite warnings of a global economic slowdown.
So, what’s an investor to make of all this?
First, don’t get carried away by headlines.
It’s very easy to get pulled in by all the information sources coming at us at once.
We live in a world of the 24-hour news cycle, and it is constantly amplified by multiple sources of TV, radio, and social media. Smart investors don’t let their decisions be governed by such things.
***While others get confused, you can profit, if you do the right things.
I’m originally from San Antonio, Texas, and grew up a fan of the San Antonio Spurs. The best player that team ever had was a power forward named Tim Duncan, and his nickname was “The Big Fundamental.”
That’s an awfully dull nickname for a game that can feature so much flash. But it really was meant as a compliment.
While other players wanted to get on TV or to grab a lot of attention, Duncan did all the little things right, game after game and year after year. And, without doing anything that looked fancy, he’d routinely play great defense, score 30+ points and the Spurs would walk away with the win – including five NBA championships.
Investors should be like Tim Duncan and focus on the fundamentals – especially at times like these.
If you want an analyst who is focused on the fundamentals, you won’t find anyone better than Louis Navellier. If you don’t know, Louis records a podcast for subscribers whenever the market swings wildly. Before anyone listens to a shouting head on TV, they can depend on Louis to give them the straight dope.
Louis is always wary of August headlines because most of Wall Street is on vacation. The low trading volume makes the market susceptible to wild swings, so no one should be surprised when things go a little crazy this month.
Then the yield curve inverted and the market dropped like a stone. At the end of the week, here’s how Louis summarized that event.
What really happened this week is that international capital flight drove U.S. Treasury yields lower. The 10-year Treasury yield and the two-year Treasury yield are both sitting below 1.6%. The 30-year Treasury yield dropped below 2% briefly intraday on Thursday and hit an all-time low this week.
In addition, the Federal Reserve has already taken steps to un-invert the yield curve by slashing key interest rates at its most-recent Federal Open Market Committee (FOMC) meeting. Remember, an inverted yield curve is devastating to the operating margins of the banks that the Fed regulates. So, in light of recent developments and the fact that the Fed never fights market rates, it’s growing even more likely that we’ll see two more rate cuts this year.
We also need to remember that second-quarter earnings and sales results were much better-than-expected. According to FactSet, about 90% of S&P 500 companies have announced results from the most recent quarter. Of these companies, 75% have topped analysts’ earnings estimates and 57% have beat sales forecasts.
The bottom line: The foundation under the stock market remains firm.
That may seem counterintuitive based on the headlines, but Louis focuses on the fundamentals of stocks, not the way the wind is blowing on any day. In fact, he’s made a major market prediction that will surprise a lot of you. You can click here to check it out now.
***While others are busy reacting to wild headlines, Louis stays true to the fundamentals of the stock.
If you’re not familiar with how Louis analyzes stocks, here is a short summary of the eight factors he uses to help determine what he recommends to subscribers.
Positive Earnings Revisions. I like to see stocks that have had their earnings estimates increased by Wall Street analysts. This usually tips us off to a stock that’s about to “beat earnings.”
Positive Earnings Surprises. Speaking of beating earnings, I also look to see if a stock has been able to beat its earnings estimates, and by how much. This is an important number to watch, because it often tells me about a stock that Wall Street isn’t paying much attention to or doesn’t yet “get.”
Increasing Sales. I also like to see a company that can consistently grow its sales over time. Why? Because it’s one number that is hard to fake. My background is in accounting, and I’ve always made sure to steer away from companies that use questionable accounting practices. Sales growth is a solid indicator.
Expanding Operating Margins. This simply tells me if earnings are growing faster than sales. A company that’s able to expand its operating margins is usually a company that has a dominant position—such as a monopoly—in its industry. This company can raise prices without seeing a drop-off in sales. And that’s a nice place to be.
Free Cash Flow. This tells me how much money a company has leftover after paying the costs of its business. A strong cash flow is important because it allows a company to invest more resources in growing its business.
Earnings Growth. This is the heart of all good financial analysis. As long as any company is able to grow its earnings consistently, its stock will do well.
Positive Earnings Momentum. It’s not enough to see a company’s earnings grow—I also want to see it growing rapidly.
Return on Equity, or ROE. This is the gold standard. ROE tells me how efficiently a company is managing its resources. I can’t interview every senior manager at a company, so I like to think of ROE as a report card for management.
All the fundamentals. That’s why Louis has a different prediction about the market than many. In fact, he has just released a brand now forecast for the rest of 2019.
Subscribers to his Platinum Growth service get a lot more than just his best picks. They get a model portfolio and regular podcasts from Louis, but they also get a stock allocation tool.
***This part is really exciting.
Louis’ stock allocation tool helps his subscribers determine how to blend stocks within the portfolio. Subscribers simply enter the amount of money they plan to invest, and the tool shows how to blend the stocks in the Model Portfolio accordingly – right down to the number of shares to own.
The tool allows you to determine what allocation is best for you based on conservative, moderately aggressive or aggressive goals.
So, do yourself a favor and put the phone down every now and then, and turn off the message alerts. The old expression I learned as a kid is that information is power. But nowadays, it seems the flood of information can be more paralyzing than enlightening.
You can depend on experts like Louis Navellier to prioritize the fundamentals and what’s important for you in the markets. And, remember, you can get his latest market forecast right now, by clicking here.
Enjoy your weekend,
Editor in Chief, InvestorPlace