Give Your Investments a Chance to Defy Gravity
Gravity and emotion are a powerful combination for rollercoaster enthusiasts. What goes up must come down. But the same is not true for investors.
Contributed by Doug Walters , Max Berkovich ,
As I head out to hit some rollercoasters this weekend (a favorite pastime of mine), I’m struck a bit by the irony. We often refer to the market as a rollercoaster ride. In fact, in March, we published an Insights titled, Enjoy the Rollercoaster. In that week’s post, we showed the similarities between long-term returns and a great coaster. This week we focus on the differences.
There are two glaring differences between a good rollercoaster and a good investment. The first is gravity, and the second is emotion.
Gravity is the engine of most rollercoasters. What goes up must come down. I cannot think of a rollercoaster I have ridden that does not end right where it began. Good investments are different. They defy gravity. Sure, they will likely have their ups and downs, but you are likely to end up higher than where you started if you stay in them long enough. Notice the use of the word “good.” There are plenty of bad investments out there – risky alternatives, meme stocks, cryptocurrencies, etc. Like a rollercoaster, these “investments” could take you on a wild ride and end up back where you started (if you are lucky), or they could derail and leave you with nothing.
Emotion is the lifeblood of a rollercoaster and the nemesis of a good investment. It goes without saying that coaster enthusiasts are driven by emotion. The anticipation of the climb, the exhilaration of the descent! But emotion can derail an otherwise good investment. Humans have a natural survival instinct to flee in the face of perceived danger. That may have served our Stone Age predecessors well, but for investors, it creates a tendency to want to exit investments in declining markets. That would have been disastrous in March of 2020, given the rally we have since enjoyed. If your portfolio matches your risk tolerance, put emotion aside, and give your investments a chance to defy gravity.
Positive Earnings Surprises
85% of companies reporting Q2 earnings have reported a positive surprise, and now year-on-year earnings growth is expected to come in around 75%.
Headlines This Week
Stocks Find Their Sea Legs
After Monday’s shaky performance, stocks found their sea legs and never looked back, ending the week in positive territory.
- As they did last March on a much larger scale, investors shifted focus quickly from the human tragedy of the Covid Delta variant to the potential economic recovery that is still expected to follow.
- The stock market was led by small-cap and momentum stocks (i.e., stocks that have performed well over the past year).
- The quick turnaround was not a surprise. With monetary stimulus still high, bond yields low, and lots of cash on the sidelines, investors have many motivations to buy these dips.
A Coke and a Smile
Positive earnings helped turn investor sentiment this week.
- 85% of companies reporting Q2 earnings have reported a positive surprise.
- Year-on-year earnings growth is now expected to come in around 75%.
- Earnings like those from Coca-Cola (KO) Wednesday, which reported 37% organic growth, highlighted the positive force of reopening, even on a traditionally stable consumer brand like Coke.
The bipartisan infrastructure bill failed a test vote in the Senate but is not dead. An infrastructure deal of some sort could help provide stimulus to a stock market that is still pricing in significant future growth.
- The $1T proposal failed, with the main sticking point being how it will be funded.
- Optimists within the negotiations still expect an agreement to be reached next week.
- Even if it passes, support in the House is not guaranteed. Stay tuned.
The Week Ahead
Looking for Hints
The Federal Reserve will be meeting next week and is expected to reveal more hints on tapering but will likely hold out on any more details.
- The FOMC will meet next Wednesday with the plan for tapering still up in the air as members debate how much more data is required before a decision can be made.
- Matters are complicated as the path to normalcy is interrupted by the escalation of Covid cases fueled by the Delta variant that has seen daily cases rise across the county.
Domestic Data Dump
Later in the week will see several key data points revealed, including the advance GDP report, personal consumption expenditures (PCE), personal income, durable goods orders, and the consumer confidence index.
- Next week’s headline metric will be the Q2 GDP report, where it is expected that the economy grew by a staggering 8%, surpassing the pre-pandemic peak.
- The Fed’s favored inflation metric, core personal consumption expenditures, is out Friday with a potentially concerning 0.7% month-over-month increase projected.
Blockbuster Earnings Week
The biggest names of the market will be reporting next week, including Apple (AAPL), Facebook (FB), Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT), and Tesla (TSLA).
- The big day will be after market close on Tuesday, where results for over $7 Trillion in market cap will be released in just a 30-minute window.
- Other big names to look out for next week include Berkshire Hathaway (BRK), Visa (V), Pfizer (PFE), UPS, and McDonald’s (MCD).
The Tokyo Olympics is officially underway after a spectator-free opening ceremony on Friday.
- The games will run until August 8th, with a total of 339 medal events across 33 sports.
- Fan favorites gymnastics and swimming will be in full swing next week, with plenty of American’s looking to defend their medals, including swimmer Katie Ledecky and the women’s gymnastic team.
- Also, keep a lookout for the two newest Olympic sports, surfing and skateboarding, as they will both happen next week.
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