Why the rollercoaster market?

Why the rollercoaster market?

Why is every day like Mr. Toad’s Wild Ride?  Might be the Night of the Long Knives…

Yes, it seems that Mr. Toad grabbed the controls on October 1, taking the market on a wild ride.  Take a look at the S&P 500 performance over the last six months and you will see plenty of peaks and valleys:

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Source: Yahoo Finance

I read an article today that blamed the volatility on weak corporate earnings.  I had to investigate.  I have to admit I did not know the relative strength of corporate earnings right now but that explanation just did not ring true to me.  It turns out, nothing could be farther from the truth.  Corporate earnings are literally the strongest they have ever been!  EVER!

010419 eps

 

These are constant dollars, meaning adjusted for inflation.  If someone wants to debate with you that the market is inflated because of weak corporate earnings, you will win that argument.

No, it’s not real earnings causing the spike in volatility.

Maybe it’s the old saying that “markets climb walls or worry”.

There certainly seems to be a lot to worry about – trade wars, trade deficits, power struggles, government shutdown, wars, immigration, North Korea, Apple missing its earnings target…

Maybe that’s it.  If Apple, for a while the most valuable company on the planet, worth over $1 trillion in 2018, is in trouble, everyone else must be in worse shape!  Yes, that’s it!  Guilt by association.  Or to use a correct investing term: investor psychology.

Investors genuinely do not know what to expect.  The United States has never had a Night of the Long Knives as promised by the new Democrat members of Congress who took office this week and who, with great alacrity, want President Trump’s presidency to end abruptly, humiliatingly.  We really don’t know what will happen when the lower house starts flexing its muscle.  We are entering new political territory.

Remember Rodney Dangerfield in Caddyshack?

caddyshack

 

 

Huge traders like Goldman Sachs have codified Dangerfield’s methodology into trading algorithms which now account for over 90% of trading volume and they have enhanced the volatility with high frequency, nanosecond momentum-based trades, injecting the ability to create massive nearly instantaneous swings into the market.  As a result of these structural changes in the way financial assets trade, a relatively small number of  human traders can now cause wholesale market shifts.  Yes, this is a Caddyshack Market.

When the market went into a tizzy over Brexit, we blogged that it was going to be a big “meh”.  A bunch of lawyers (barristers?) would make a ton of money (pounds, dollars or Euros, take your pick) but at the end of the day, not much would change.  We can’t say for certain if the current environs will yield the same result – a “meh” outcome.  They should, but when investors panic en masse, massive “corrections” ensue.  We will know in 60 days if investors can stomach the impending political mayhem.  Might calmer heads will prevail?  That would make all of the difference to the markets at this point.

What is a prudent business leader to do?

Call us!  Vertical Capital Advisors can help your business plan and execute strategies that enable your enterprise to thrive in all market conditions.

 

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ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area boutique investment banking firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108
678-591-0273

 

 

Author: JoeBriner

Joe Briner is the Managing Director of Vertical Capital Advisors LLC. He is a financial executive with 25+ years experience starting, growing and leading profitable businesses, most recently focusing on helping businesses of all types recover, grow and thrive.