2015 came to a close with a whimper and 2016 opened with a bang! The stock market is down 5.9% after eight days of trading in the New Year. China’s stock market took a nose dive before trading was halted on two separate days. World markets followed, worried about slowing global growth and the dramatic fall in oil prices. Panic selling is hard to watch! Fear that China’s economy is slowing added to the drop in oil prices as they have been a huge importer of oil and other commodities. There have only been three other instances in history when crude oil prices declined 50% in six months; 1986, 1991 and 2008. Today’s decline resembles 1986. It is rare for oil prices to drop this much without a recession. Like 1986, our economy is relatively strong while worries persist that global growth is declining. In 1986 small, undercapitalized energy companies[more…]

Fear is rising as the market falls. We have been suspended in mid air, waiting for the market to break out of a narrow trading range. Suddenly, we break the range, stocks fall and anxiety rises. We need to put things in perspective. The S&P 500 is up 104% in the past five years, 1.27% over the past twelve months and is now down 2.99% year to date. It wouldn’t be surprising to see a 10% decline before this is over as stock prices move more in line with earnings and expectations. The market has not “tanked”. In fact, if we take a long-term view then this is positive. The market has been on a bullish tear for 6 1/2 years and a pull back is expected. Risk aversion is heightened and the good stocks get sold off with the bad. There is opportunity.

The Standard & Poor 500 Index has reached an all-time high and investors wonder if this means stocks are overvalued. Should you sell? Knowing when to sell is the ultimate challenge for many stock investors. We hesitate to take a loss, hoping the stock will recover, and we hate to sell our winners, thinking we haven’t seen the top.   It is relatively easy to buy. You hear a good story, the stock looks “cheap”, the market is down and sentiment for stocks is strong. How do you know when to sell? History has proven that losses are hard to recoup so it is best to avoid mistakes and take a disciplined approach to investing. Emotions are your enemy when it comes to investing. We often regret too much cash when the market is rising and we wish for more after a market decline. Today, pundits tell us the market is[more…]

Stock prices continue to climb as earnings estimates for US companies come down, resulting in price earnings ratios that are beginning to look stretched. For example, many large cap growth stocks such as Starbucks are trading at 30 plus multiples.  Going forward there are only two ways that valuations will look reasonable; either stock prices decline or earnings move higher.  What is surprising is that the market has not followed the earnings estimates downward.  We mentioned in earlier notes that only two things ultimately drive stock prices – earnings and interest rates. The reason the market is ignoring the decline in earnings estimates is low interest rates.  Investors drove stocks higher again in 2014 in the hunt for higher returns. Contrary to what pundits expected, the interest rate on the 10 year US Treasury note fell from 3% at the end of 2013 to 2% by yearend 2014. Significant amounts[more…]