Author : Joel Charalambakis
Date : October 13, 2014
So what is going on with the recent market volatility? Is there anything to really be concerned about? Well, it would seem that the global markets are tired from so many headlines. Take your pick – European slowing economic growth, Ebola, expectations for rising interest rates, Russian/Ukraine tensions and the list goes on. The number one cited reason is the slowdown in economic growth in the European Union. Let’s take a minute and analyze that argument from the standpoint of the mega caps traded on the NYSE. While the mega cap stocks do derive some of their earnings from Europe, that trend has been on the decline for some time. While the US economy does have its issues, corporate growth continues its uptrend. As long as corporate America can still continue to turn in positive earnings, the valuations for the US equity markets can be justified. After all, what an investor is buying when a stock is purchased is the present value of future earnings of the company. It is when that earnings trend slows that the stock price should adjust to reflect the change in the future earnings of the company.
The technical indicators have shown this market to be oversold for three days now. All the talking heads are calling for a 20% correction. All that amounts to is good headline talk. Once we get to see more earnings from the latest quarter this recent sell off should reverse. Let’s look at Alcoa’s earnings announcement last week, they beat their earnings estimate by $0.08/share. That equates to a beat by 34%! Alcoa is the largest aluminum producer in the free world. It stands to reason that if the largest publicly aluminum producer on the planet is exceeding its earnings estimate, there is some real economic expansion going on. Companies typically don’t buy large amounts of aluminum to store it in a warehouse.
Additionally, this latest sell off should give the Fed doves the ammunition they are looking for to push out rate increases for a bit longer. Maybe that is the real reason behind the drop.
Our advice is to be patient and don’t over react to any of the headlines. We will be looking to buy this dip and profit on the rebound.