Companies are Exceeding Expectations. Why Isn't the Market?
April 30, 2018
By Colin OShea Securities Analyst
Earning season is underway for the first quarter of 2018. Thus far, eighty percent of companies reporting have beaten expectations. While this is good news, you may wonder why the results are not showing up in market prices. The reason is that the stock markets are a forward-looking mechanism. In other words, today’s prices reflect expectations for tomorrow. Does this mean investors expect a deceleration in earnings or is it just uncertainty?
This uncertain market sentiment certainly appeared after a record setting January, the best start in twenty years. February brought volatility and a market correction, attributed to worry among investors over trade tariffs, inflation, and rising interest rates.
The first quarter witnessed negative returns for both the stock (S&P 500) and bond (Bloomberg Barclays U.S. Aggregate) indices for only the ninth time since 1984.
We expect the remainder of the year to be positive but lower returns than last year. This is in line with historical Presidential cycle returns. The chart below shows lower average returns during the most of the second year of a Presidential term with strong fourth quarter performance.
Diversification is the key. Performance is more driven not just by stock selection, but also by diversification. Many people think they are diversified because they own several mutual funds, but it could be that your funds have overlapping holdings. We analyze our funds to ensure we are not inadvertently overweight due to duplication of holdings. If you have any outside holdings, we would be glad to analyze your funds for overlap. Contact us to have an investment professional analyze your holdings today.