Uphill Battle for StocksSubmitted by AMSG on April 8th, 2018
Bottom Line for Investors
My bottom line for investors this week can be summed up with a single equation: Earnings Estimates + Tariffs + Tech Regulation = 2018’s “Wall of Worry”.
I’ve asserted that ‘too high’ earnings expectations could limit stocks’ upside potential, but it’s important to note that I still very much think stocks have upside potential. That’s because I think that tariffs, a high bar for earnings, and new regulations for the technology industry all contribute to the construction of a shiny, brand new, “wall of worry.” When I think of all the aforementioned negative forces together, I believe we’ll see a pattern develop that I’ve seen numerous times in my decades as an equity investor. It goes like this:
- Phase 1: A negative (like tariffs, a trade war, and regulation) surfaces.
- Phase 2: Market participants fear the worst, and rush to price-in the worst-case scenario.
- Phase 3: Volatility ensues and talk of a bear market increases (we’re at this phase today in my view).
- Phase 4: Over time, market participants realize that the feared negative did not turn out to be as bad as everyone originally expected.
- Phase 5: The market resumes its upward, longer-term trajectory.
Stocks have an uphill battle with a few nagging headwinds, and we’ll be watching them develop closely. But I think we’ll see phases 4 and 5 in the not-too-distant future.