We pointed out last month, that a basic fundamental analysis of earnings and interest rates helps to explain why the stock market has recently gyrated. The Fed is “threatening” to tighten interest rates, while the US is in a profits recession. Within the context of the basic valuation formula, interest rates might rise while earnings forecasts are being revised downward. The numerator in the formula is going down, while the denominator is expected to soon increase.
If one thinks the Fed will wait to raise rates (as we do) and if one thinks that the profits cycle will trough by year-end 2015 (as we do), then it follows that 2016 might be a good year for US stocks. However, if one thinks the Fed will raise rates sooner and the profits cycle will trough later, then the basic formula suggests that stock market volatility could continue.
However, it all comes down to the basic fundamentals: earnings and interest rates.
Taking Grounders In Spring Training
Practicing basic fundamentals is critical to one’s success in any endeavor. In baseball, it means the mundane and repetitive task of taking ground balls in spring training. Successful baseball players are typically willing to go through the monotony in order to hone their skills.
Investors too often forget their practicing the fundamentals is critical to their success, too. For equities, it’s all about the basics of earnings and interest rates, and ignoring the ever present distractions. It isn’t very sexy to invest in equities using this commonplace approach, but no one gets to the Hall of Fame without mastering the basics.
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