Yesterday, and as of late, the market has been bent on selling, no matter what the reality is. Panic selling is in vogue. It is never pretty to watch, but, in the end, it can be helpful to a longer term up trend. Let the air out of the selling bag, so to speak, and when the bag is deflated, the buyers will come in to inflate it. If the panic selling makes you nervous, just say “guzfraba” over and over again quietly to yourself. And FGS, turn the dang news off!
Yesterday, I had a phone call from my brother. When the market does what it is doing now, he gets concerned, just as millions of other folks do. So, I ran down the reasons this “correction” is not anything like 2008 and 2009. You see, like millions of others, he remembers those dark and scary days.
Anyway, suffice it to say I told him there is no structural reason to worry. There is no housing bubble, no financial collapse, and stupid people killing stupid people for their ideology is not affecting the global economy, other than the economic war between the US and Europe on one side and Russia and Iran on the other. The sanctions associated with the Russian front are negatively affecting the European economy, which has a real market effect. On the Iranian front, if it gets it nuclear act together, it is bound to have a positive effect on the global economy.
The euro is holding at multi-month lows (1.26 more or less), which reflects a lack of confidence in the currency. Understandable, since the German economy has been most affected by the war with Russia. It has actually moved into contraction. Now, if Iran can find a way to agree to terms on its nuclear program, then sanctions come off and it begins exporting lots and lots of oil legally and freely again. A quick look at the price of oil this morning ($90 for WTI) suggests that if Iran floods the market with its oil, that price will head even lower, much lower, as currently there is a global oil glut. Good for the consumer, no?
Now, as to the fundamental economic situation here in the US, the picture is quite different. The engine of growth is picking up steam in all areas, but the one that counts the most is clearly gathering momentum.
- Challenger, Gray and Christmas reported that planned job cuts fell to 30,477 in the month of September, the lowest level in 14 years.
Now, the above is not a one-off. For the third week in a row, jobless claims have been under 300,000, which means the underlying trend is to the downside, and it has been for a while. The point is folks are getting jobs and keeping them.
- September’s level is 14.8% lower than August’s total layoffs of 40,010 and is 24.4% below the year-ago level of 40,289.
Underlying the employment situation, which is steadily improving, is the main reason the market will not fall apart.
- Job security is being helped by the fact that corporate profits remain near record highs.
You see, when panic selling happens, all the reasons laid out heretofore for a market breakdown come into play. One of those reasons is the valuation argument. Many have argued that a P/E for the S&P 500 (price to earnings) between 17 and 18 is not sustainable. So, if corporate profits in the third quarter either a) remain at current levels, or b) rise above $30 per share on average, then the P/E drops either slightly or in a big way. Either way, investors will buy into the market, which will end the sell off and begin the next leg up.
True, it will be a longer road back, but the market will feel more solid and in tune, rather than the volatile sensibility we have been enduring for quite some time now.
I didn’t tell my brother the above exactly as I wrote it, but the message is the same – unless some US economic structural calamity happens or the geopolitics get much, much worse, the market will not collapse. The market is simply being the market – seeking balance. Unfortunately, when it does this in panic mode, it floods the plain, which seems worse than it really is.
The fact is the water will eventually soak in, which will make the plain more amenable to the seeds of growth that farmers will eventually plant. Investors will return.
Trade in the day; invest in your life …
