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Emotion Versus Fundamentals

Volatility is back in a major way. And it has investors wondering if there’s about to be a repeat of 2007 and 2008. Are we on the brink of another recession?

Our thought is that you shouldn’t jump to that conclusion so soon. The volatility is definitely there and we saw some major dips in the market throughout the past couple of months. However, just a few weeks ago we had the best stock market day of 2014. In fact, during mid-October, we saw the best week that the market experienced in nearly two years. Many of our clients will ask us how the market can be crashing one week with bad news globally, and then surge by 4 percent the next week? No one knows, on any given day, how or why the market will do what it does. But, as a long-term investor, it’s important to always remember the fundamentals. 

In short, you always want to remind yourself that there is an emotional toggle with investing. This toggle shifts between the emotions or sentiment that the collective marketplace is experiencing, versus, the fundamentals that fuel the market. The emotions could be anything from the fear of China slowing down to the European economy falling back into a recession. Another fear could be Ebola spreading and then causing a global economic impact. The fundamentals that fuel the market are things we think about when it comes to companies earning money or not earning money. It’s that simple. As a long-term investor, you want to pay attention to the balance of the fundamentals. 

Now, here we are in earning season where we get to hear about how companies are doing—a fundamental. After all, this is the lifeblood of the U.S. stock market. We’re about 40% through the earning season, and 70% of the companies that have reported so far have beaten expectations on the upside. Same thing with revenue, it’s coming in stronger than expected. These companies aren’t barely making it, they are actually selling more. 

So, before you worry about whether or not a recession is near, just remember the fundamentals and pay attention to emotion to determine if it’s necessary to can hone your strategy as a long-term investor.


 

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