What To Do After Drop in Equity Markets

August 22nd, 2015

This week we saw a significant drop in the U.S. and Global equity markets.  To those of you that I have spoken to recently, this should come as no surprise.  Earnings for U.S. companies have been declining, quarter over quarter for more than a year and in spite of this, stock prices had been increasing, causing Price Earnings ratios to grow to unsustainable levels.  Prior to this week’s pullback, P/E ratios were approaching 19 times earnings.  Today, we are closer to 17.5–still above the 5 year average of 16 but well off the peaks, which I view as a healthy outcome.

But this story is not just about earnings.  There is more at play here.  Energy prices also factor into the equation.  Over the last two years, we have seen the price of oil drop from over $100/barrel to less than $40/barrel today.  This is due to a drop in demand (as our cars and trucks become more fuel efficient) and an increase in supply as the US uses technology (Fracking) to squeeze more oil out of fields previously thought to be fallow.  For the global economy that we live in, this is certainly bad for oil producing and oil servicing companies, as seen in the declining share prices of Exxon/Mobil and Chevron/Texaco.  Furthermore, when these companies share prices drop, it can have a disproportionate effect on stock indices that are  capitalization-weighted (as most are), since the oil companies tend to be some of the largest companies on most indices.

With that said, even though declining oil prices may be bad for Oil and Oil services companies, most economist view these drops as a very positive outcome for global economies.  Since lower oil prices affect so many things, from transportation costs to manufacturing, in the long run they are usually very stimulative to the global economy.

Beyond corporate earnings, many other economic factors are still reflecting a very strong economy, including low interest rates, new home construction, resale prices for existing home, lower unemployment and increased wages, to name a few.

Bottom line, I felt like a correction was in order, but I do not believe the wheels have fallen off the economic cart.  I still see opportunity for more growth in the US economy and so for the time being, staying the course seems to be the most prudent thing to do.

As always, should you wish to discuss your individual accounts in more detail, please do not hesitate to call.  I can be reached at 949-756-2226.

Marshall Eichenauer, Jr.

ps. For more on this topic, please see the links below;

Stock Selloff Looks Overdone-Bloomberg-Businessweek

China Fears Hands Wall Street It’s Worst Day Since 2011-Reuters

Why Stocks Are Tumbling-US News and World Report

Advice After Stock Market Drops-Take Some Deep Breaths and Don’t Do A Thing-NY Times

Is Angela Merkel Europe’s Economic Bully?

July 9th, 2015

As all eyes are focused on Greece and how they will resolve their debt crisis, attention is rightly turning to Germany, Europe’s economic heart and the driving force behind a push for greater Greek austerity, even in the face of 25% unemployment and clear stagflation.  This July 9th article from Bloomberg Businessweek points out that as Germany’s leader, Angelea Merkel is really the one driving policy in the region, in a way that may be good for Germany but not necessarily for Greece and other European partners.  To view the entire Bloomberg Businessweek article CLICK HERE

How the Feds Influence Interest Rates; Explained

June 15th, 2015

Anyone watching the evening news has likely heard about the pending increase in interest rates by the Federal Reserve bank.  But what exactly are they doing.  This article from the Los Angeles Times does a great job explaining the tools at the Federal Reserve’s disposal and how they influences broader interest rate environment.  To view the article, CLICK HERE

Mortgage Rates Top 4% in Test for Housing

June 15th, 2015

Mortgage rates extended above the 4% threshold last week in concert with an increase in the yield on on the 10 year treasury.  Investors are demanding high yields on the 10 year treasury as they anticipate an increase in the Federal Funds rate.  Time will tell what impact these higher mortgage rates will have on the housing market, but clearly they will increase the cost of borrowing, which in turn will have an impact on housing prices.  To read the entire article, please CLICK HERE