A bumpy ride? Your Weekly Update

Market actions the last couple of weeks certainly have all of us paying close attention.

This week’s Update looks at these events from a historical perspective. As well, we discuss the quarterly earnings statements, which are steadily arriving at this writing.

We think you’ll appreciate the deeper look. Please let us know your thoughts and as always please call us if you’d like to chat about your accounts—or anything else!

Best always,
Lee and Jeremy


This Week’s Quote:

“The way to make money is to buy when blood is running in the streets.”
― John D. Rockefeller


JL Davis Thoughts This Week:

It’s hard to say if the near 1000 point decline in the Dow Jones index (and a similar decline in the S&P 500) over the last month or so would have constituted “blood running in the streets” in the view of Mr. Rockefeller. But he’d surely think it was a start.

While it’s an easy thing to suggest that folks buy when stock markets retreat, it might be more challenging to suggest that folks stay invested at such times. Easy to suggest and hard to do. Yet our experience tells us that more often than not, those who follow a consistent strategy tend to do better than those who don’t.

Even after last week’s steep decline, the S&P 500 was up around 12% over one year ago Friday. Most would have taken that outcome, no questions asked. But did one year ago really feel like a “buying opportunity”? Does today?

It’s true that plenty is going on in the world right now. Europe continues to weaken. Fears of a slowdown in China have emerged. The U.S. dollar is strengthening. Yet Europe’s problems are nothing new, having been with us since before the events of 2008. And China’s slowdown, if there is one, may be inconsequential to U.S. exporters, since we export less than ¾ of 1% of our GDP there (around half of what we export to Mexico). The strengthening dollar? A strong dollar actually coincided with the large stock market run-ups in the 1980’s and 90’s. And what about Ebola? Japan’s continuing doldrums? Russia and Ukraine? Taken in order, Ebola is not and will not be a threat in the U.S. according to the CDC. More people died from the flu last year. Japan’s doldrums are nearing two decades in length. Nothing new. Russia and Ukraine appear to be nearing a deal and tensions seem to be declining for now.

So what’s driving the volatile markets? We think its uncertainty…uncertainty related to earnings. Regular readers of the Update know our belief is that corporate earnings and only corporate earnings drive stock markets. Solid corporate earnings mean good stock performance in our view, just as poor earnings equals poor stock performance. Those quarterly earnings reports are coming out in earnest this week and next—and we’ll know more when they do.

Are we witnessing the arrival of a “correction” or just another “buying opportunity”? For the long term investor, Mr. Rockefeller’s words resonate right about now.**

Lee & Jeremy

http://www.forbes.com/sites/jjkinahan/2014/10/13/volatility-update-pressure-on-earnings-to-deliver/


Market Week: October 13, 2014
The Markets

Concerns about signs of weaker growth abroad seemed to outweigh domestic corporate earnings reports last week as volatility went extreme. The Dow industrials saw triple-digit swings four days in a row that wiped out all of the index's year-to-date gains, and both the Dow and the S&P 500 had their worst weeks since May 2012. By the end of the week, the S&P was down 5% from its most recent high (a 10% drop is considered a correction). Meanwhile, the Russell 2000 fell solidly into correction territory, ending the week down almost 13% from its most recent high in March. The Global Dow also turned negative year-to-date.
The volatility sent investors once again seeking the relative security of U.S. Treasuries. As the price of the benchmark 10-year note has risen, the decline in its yield has accelerated in each of the last four weeks; the 10-year yield ended last week at its lowest level since June 2013.


Last Week's Headlines

• Minutes of the most recent meeting of the Federal Reserve's monetary policy committee showed that members are worried about slowing global growth. The potential domestic impact of dollar strength, which could become more problematic when interest rates increase, also was a concern, as a stronger dollar could make U.S. exports more expensive and weigh on the domestic economy. Members also wrestled with how to communicate any shift in the committee's expectations about when a rate increase might occur.
• European Central Bank President Mario Draghi said that the already sluggish European economy seems to be slowing further. Coupled with discouraging economic reports out of Germany--exports fell 5.8% in August, and manufacturing output and new orders also were down--Draghi's statement raised concerns about the financial health of Europe as a whole. To add to the gloom, the International Monetary Fund also lowered its outlook for global growth next year, though its U.S. forecast was more optimistic.


Key Dates/Data Releases

10/15: Retail sales, Empire State manufacturing, wholesale inflation, Fed "beige book" report
10/16: Industrial production, Philadelphia Fed manufacturing, international capital flows
10/17: Housing starts, options expiration


Eye on the Week Ahead

The question of the week will be whether last week's volatility exhausted negative sentiment or there's more to come. If domestic Q3 earnings reports and corporate guidance are robust, they might help provide some counterbalance to global pessimism. However, many large U.S. corporations earn a large percentage of their profits overseas; if forward guidance tends to be negative, that could have the opposite effect. Options expiration at week's end also could affect volatility.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.


Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014