Wednesday, April 11, 2018

Investing in a Risk On Risk Off Environment


It has been a rocky start to April that's for sure. I was deeply exhaling after the 1st quarter came to an end licking my wounds after an almost 5% loss in the quarter.

I know that short term results are not what matter and they don't, I just have the time now to analyze what the heck is going on in this environment of day after day of risk on risk off.

The second quarter is starting off much the same with the S&P down 230 points today, up 400 yesterday and down 600 Monday. PHEW, when will this madness end and how will it end and should I even give a f*ck?

So, why all the selling Monday and all the buying yesterday? Trump for one and it's a big ONE. His grudge with Amazon has been epic taking most of the FAANG mini index with it. China and the on going cage match with tariffs becoming another market sledgehammer. Markets recovered once the Chinese committed to a more open market on autos. Manufacturing in spite of the tax cuts has been announced soft at best.

Employment numbers came in lower than expectation.

All this triggered selling on Friday and we still haven't recovered. Here in Canuckistan our markets have been affected the same way. All the old reliable sectors have nothing to allay investor fears. Real estate is taking a bath combined with interest rates on the rise. Utilities, telcos and financials all getting hammered. There is no place to hide in this current environment, so it seems.

Gloomy headlines in spite of relatively strong corporate earnings has shown us just how lightning quick this market turns from slight up days to massive down days. The top guns in the Trump administration have failed miserably in communicating their intent on trade, tariffs and Syrian missile strikes. Markets are jittery.


RE is too expensive for city mice and trending up with the Ontario Libs suggesting to municipalities more low income units should be built. This gooses rentals and pushing citizens out into the burbs I guess. Everything is getting expensive.


Earnings

If dividends are the mother's milk of stocks then surely company earnings are the whole cow. Without them going up in a positive way and making money, the cow dies.

By all expert analysis I've read lately, they expect corporate earnings to rise on average over 18% more than last year and a further 7% bump in top line revenue. By all accounts it should be a good investing year as the room up is expanded due to that corporate tax cut moving through. 

So, once you factor in that positive outlook, stocks actually look quite cheap. Cheaper than they did last year. After all, wasn't this the market correction all those talking business heads said we needed and needed badly last year. 

They were all cheerleading the market pulling back after a meteoric rise lasting 9 years. We needed this so why the gloom? I guess like the risk off risk on days they need to be happy then sad and back to happy. Something to talk about as fodder to clients and nothing more. Try to not let it affect your investing life.


The Year Ahead

Stocks are cheap and those that have been selling will soon be coming back is my guess. It will still be risky going forward and volatility will rule the day but soon these bargains will not sit in the bin for much longer.

With valuations getting attractive, earnings improving and stocks being cheaper, investors will soon be flocking back. The last thing we are in is a heated stock market or a bubble. Certain bubbles like pot, crypto and Canadian real estate have already been pricked unless you're turned on by condos and condos only. In that case therapy and not stocks are your cure.

Stocks are getting to the point where they're too cheap to pass up.

My Final Take


If you are a dividend growth stock investor then this is manna from investing heaven. Buy big boring companies and enjoy growing income over time.

Indexers can ignore the noise and enjoy balance and embrace it because this is a good way to escape. I'm working on it.

The risk on risk off days will continue in spite of all the improved earnings, strong economy and investor confidence. We just have to get used to it.


Recommended Reading:

Del Vicario on Growth Stocks

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