Road less traveled. Stocks had another bumpy session on Friday as investors continued to shed tech shares, holding down the indexes. Despite a late session pop for the S&P and the Dow, the major indexes all ended the week in the red.
N O T E W O R T H Y
The market speaks… listen. It’s Monday and the sun has become a bit more stingy with glow as we close in on the Autumnal Equinox rather quickly. As a reminder, the Equinox is when the sun is directly over the equator. That will happen next week on September 22nd. On Monday, December 21st we, in the northern hemisphere, will experience the Winter Solstice, which is the shortest day of the year… talk about stingy. Wouldn’t it be great if we could control the sun so that we could make weekends and holidays stay brighter longer and perhaps have it sit at that perfect angle on those good picture days? Of course, I write that question with tongue firmly in cheek, but before I go on, I am sure that you know that I am not the first person to wonder if it could be done and I will surely not be the last. If you are a realist, or you have been around for a while, you know that time and seasons march on, whether it is convenient for us or not. Most of us have learned to embrace it.
Because it is Monday, I will wax philosophical and drop another Wall Street adage on you. Don’t fight the tape. It’s an oldie but a goodie and it simply reminds us not to fight the trend. When I went to graduate school many equinoxes ago, I learned that we could determine a company’s health by looking at its financial statements. I took at least a dozen courses focused on that very task. I also took lots of economics classes which taught us how to evaluate the economy and follow its cyclical ups and downs. Combining all of these, we were taught that we could forecast a company’s health, earnings, cashflows, etc. Once we had that in hand, it was just a matter of applying one or two more courses worth of finance to come up with what the theoretical price of a stock should be. I recall my first attempt was with General Electric (GE), which at the time (it was the 80’s) was a hot company and run by the legendary Jack Welch. After weeks of financial spreadsheeting I came up with the number and… and… and… it was WAY off. The stock was trading nowhere near my theoretical value. I thought, “could I have just discovered that GE’s stock was vastly overvalued?” Before I called my broker to short the stock, I decided to check my spreadsheet for errors… and found none. To be safe, I changed a bunch of my assumptions and performed an elaborate sensitivity analysis called a Monte Carlo Simulation, and in every instance I came up with a price that was far below the current market price. I was perplexed but thankfully, I didn’t short the stock because it proceeded to climb… epically… for the next 15 years. Turning the clock forward I learned that the word “theoretical” meant just that: theoretical. The exercise of modeling a company’s financial strength and forecasting its future profits are still quite critical and a very necessary first step in assessing its stock’s health and potential. It is also important to determine whether the stock is cheap or expensive relative to its peers. But at the end of the day, the market itself will pass final judgement on what the stock’s actual price is. If many investors clamor to buy a stock, it will go up, despite its theoretical value. So, to have a true winner, not only do we need stocks from healthy companies with great growth prospects, but also they must be embraced by the market. These past few months have been quite challenging as we have witnessed stocks rise to new heights in the midst of a pandemic, slowing earnings, and a recession, leaving many analysts (and academics) scratching their heads. I have reminded you many times that a stock’s price should reflect all of its future prospects. By the word “all”, I mean far beyond the pandemic. That is why some stocks continue to rise in the current environment. In the case of the high flyers, investors believe that those future prospects are going to continue to be bright. That doesn’t mean that there won’t be setbacks along the way, but a company that is healthy with solid leadership should persist. With that I will leave you with one final bonus Wall Street saying. The market is always right.
Stocks closed mixed and tech shares continued to lag in Friday’s session capping off another week of losses for the major indexes. The S&P500 climbed by +0.05%, the Dow Jones Industrial Average rose by +0.48%, the Russell 2000 Index slipped by -0.70%, and the Nasdaq Composite Index fell by -0.60%. Bonds advanced and 10-year treasury yields gave up -1 basis point to 0.66%.
– The week ahead will include a few regional Fed reports, Industrial Production, Retail Sales, Building Permits, Housing Starts, Leading Index, and University Of Michigan Sentiment. The FOMC will meet tomorrow and Wednesday and will follow up with a policy statement and press release. This will be the last policy meeting before the election, so investors will be listening carefully. Please refer to the attached economic calendar for details.
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