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Hello everyone and welcome to another episode of EricksonTV, Curtis here with Lauren. As
most people know the equity markets have had a very good year, year to date. Clients have
been asking me some questions and I've been hearing some radio ads wondering if these
stock market gains are, in a sense, phantom gains because of the easy monetary policy
that the government has and things like that. Then I saw an article in Wednesday's USA Today
talking about some of the reasons they think the stock market is doing so well. I know
people tend to focus on the S&P 500 and the Dow Jones, which are having great years, but
we also know from our diversified portfolios that there are other indexes that are doing
even better for us. But for the purposes of this episode let's just talk about the S&P
500.
USA Today's perception was that what is continuing this growth in the stock market indexes is
that corporate profits are looking very good. In fact for the 3rd quarter, 67% of the corporations
in the S&P 500 are outperforming estimates. About 20% are matching estimates and only
about 13% are underperforming estimates. And that's pretty close to the historical averages
actually. Their second thought was that because of the low interest rates and the still high
unemployment rate companies are showing these net earnings from just cutting cost and that
it's not necessarily a great economy still. But as a contrast to that, what they are saying
here is that company sales are actually increasing 4-5% on average for the S&P 500. So what's
your take on this?
There's always something to be worried about isn't there? If people aren't worried about
phantom stock gains they're worried that the bond market is going to collapse because interest
rates have to go up although we have no idea where interest rates are going to go. And
if they're not worried about that they can be worried that real estate is in a bubble
or whatever it is you want to worry about. I think people have a tendency to make a decision
that things are either good or bad and then they will simply make up a reason to support
that decision. So if people have made the decision that things are bad then they will
believe the stock gains are phantom gains. I don't think there's too much else going
on there.
It's clear though, or it should be clear, that most people weren't predicting that US
corporations would be doing as well right now as they have been doing and that is why
the stock market has gone up more than average. Things did better than expected. And the one
thing I would point out that is always important to remember is if people had expected that
sales would go down and sales go down but only by half as much as people had expected,
the stock market would go up. So that's what really matters. It doesn't matter whether
the economy is doing well or poorly and that's why you can never predict this stuff.
For this upcoming 4th quarter there's been a trend in the companies as they provide guidance
for the future. They are not providing losses but they want to lower your expectations.
That actually bodes well because it provides an opportunity for further surprises in the
future. But who knows? So the takeaway is what generally drives stock prices are earnings
and earning have been good so there is not any reason to think these are phantom gains.
Thank you for watching this episode of EricksonTV and we'll see you next time.