Over the past week, volatility picked up in response to the trade deal with China (or lack thereof). For much of this year, we’ve expected the trade deal to go through and for news related to China to fade from the front page of the papers. However, that all changed and President Trump is back on Twitter, negotiating in public. While we should all be somewhat used to his style, the constant tweets (some proclaiming great things ahead – others threatening tariffs on all Chinese goods coming into the U.S.) raise anxiety in the markets and investors alike.
As I’ve said many times before, we don’t invest, nor make strategy changes, based on politics. So while this current spate of volatility increases everyone’s unease, I would like to draw your attention back to corporate profits and the relationship between profits and the market’s movement. This chart shows the S&P 500 over the last ten years (blue line with the scale on the left axis) versus the earnings per share of all the companies in the S&P 500 (black line with the scale on the right).
Let’s reflect on the relationship between the two lines. Yes, the blue line (S&P 500 daily price) shows the daily gyrations of the market, but forget about the daily fluctuations and focus on the big picture. What is clear from this chart is that as corporate profits go up (earnings per share), the S&P 500 goes up too. Is it reasonable for the S&P 500 to be close to all-time highs right now? Sure it is because the profits of S&P 500 companies are at all-time highs.
So what happens next? I suspect that somehow, someway we get some kind of trade deal with China. We need them; they need us; and President Trump would probably prefer less market volatility as we head toward next year’s election. And even if we get a trade deal, the market will continue to gyrate daily because there will be some other daily news that traders will react to. But because we’re not investing for next week or next month, we’ll sit back and focus on corporate profits – what’s happening now and expectations for the future. Because we know that as profits rise, so too does the market.
If you have questions or would like to chat, please let me know.
