We are living in an increasingly complex world with so many voices beckoning for us to listen to them. It can be very difficult to know who to trust and believe… especially as it pertains to the financial markets. For example, I walked into the kitchen at our office last week to get a cup of coffee, and CNBC was on the TV. This caught me by surprise because The Golf Channel is usually on – muted every week except for Masters week! Anyway, there were two distinguished economists talking about oil prices and the future of the global economy. One economist said that he was confident that a recession would happen within the next six months. The other said that the economy was in great shape. How do we know who to believe when we are surrounded by such polarizing commentary?
When faced with this dilemma, we always go back to the basics. What makes stock prices move higher or lower? That answer is simple. It is all about earnings (i.e. is the company expected to make more money in the future than they did in years past?). If a company can continue to increase their earnings, this is good news, and the price of the stock will typically move higher over the long term.
With that being said, 2022 has been a real puzzle for us because earnings estimates for a majority of companies continue to come in higher than earnings in prior years (i.e. companies are expecting to make more money). If there was a recession “right around the corner,” a lot of companies would be revising their earnings estimates lower (at least this is what has happened historically). Clearly, there is an unusual disconnect between what analysts expect to happen and what the market is expecting.
Why volatility is a good thing
Market declines are not new and should be expected from time to time, especially during times of geo-political tensions. If you long for low volatility, you are only inviting speculators (not investors) to participate. In return, these speculators will contribute to future volatility as the proverbial herd of elephants try to squeeze through the “skinny door frame”(i.e. sell) at the same time.
What should you do with this information?
Our #1 recommendation for ALL investors is to have an investment process. Discipline and income-generation are the core principles of our process-driven investment strategies. Without knowing what you own and why you own it, you are more subject to act on emotion which often leads to undesirable results. Media companies know that dramatic headlines get more viewers and “clicks.” Thus, there is a built in bias to be sensational in their reporting.
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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Any opinions are those of Matt Price and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance does not guarantee future results. Keep in mind that individuals cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 4550732