The stock market has been on a roll for 10 months – and so has stock market confidence. Earnings have buoyed much of this confidence, but it can only do so much. So what happens when it falters? We’ll get to that below. First, let’s look at earnings and confidence separately.
Earnings have been awesome
Second quarter earnings reports are nearly finished, and we have seen some solid surprises to the upside. Earnings have increased by almost 10% over 2016. This follows a double-digit gain from the first quarter, and some estimates are predicting more double-digit gains for the second half of 2017. This will help buoy the markets until the earnings cycle inflects to the downside. We may have another two or three quarters of strong earnings down the road, but as always the markets will sniff it out.
Stock market confidence is responsible for the bull market
With strong earnings comes stock market confidence. Investors are willing to take on market risk, providing liquidity, demand for stock and rising prices. It is currently supported by many factors, chief among them a strong jobs market. Wage growth is a problem, but in a country of over 330 million people, plenty of jobs and low inflation, there is money to invest (or save). Those who took some risk in 2017 have likely been rewarded. The bull market continues on. Until it doesn’t.
What happens when confidence falters?
When there is a crisis of confidence, there is doubt – even if companies deliver on earnings. Anything can shake one’s confidence, and it is often a surprise that does the trick. As traders, we have been blindsided over the past couple of years. We have faced the prospect of the long bull market ending, but the buyers continue to step up.
In 2016, we had worries about China, North Korea and the Middle East. Then we had Brexit in June and the US election in November. Markets nosedived, volatility surged and buyers scooped up stocks that went down.
Let’s not forget the tragic terror attacks that have occurred around the world. They have shaken our souls to the core, but investors shake it off and continue to buy the dip.
In 2017, the multiple and never-ending issues from the Trump administration have caused angst and some sharp losses. Market players anticipated positive policy changes but did not price them in completely, leaving an out just in case somethings radically changes. It really doesn’t take much to start a fire, only a little spark.
Each pullback, no matter what the cause, is another reminder that things can/will change. It’s our job to make the adjustment.
Some investors have been fleeing the scene, but it may be premature. If stock market confidence continues to erode, so will the flow of capital. With stock prices up on lofty expectations, the money flow will slow or stop and stock prices will fall – no matter how good the earnings.
Copyright: peshkov / 123RF Stock Photo
