06 Jul 2018
Business, Economics, Investing
July 6, 2018 glacierinvest

Well despite my doubts, it looks like a legitimate trade war may be happening. How far it goes or how severe it becomes is anybody’s guess. I’m still a little skeptical of how significant the impact will be, but admittedly I may be underestimating the potential severity. We’ve already seen sectors likely to be most negatively impacted by tariffs underperform. Whether there is further downside in those segments of the market from here is unknown. And we actually won’t know until company management teams provide details related to their respective businesses.

Until then, 2Q18 earnings growth is still expected to be strong. The domestic economy is in good shape. Sentiment continues to be favorable for the most part. Sure there are things to worry about, I suppose, whether its rate increases, quantitative tightening in the US (and potentially Europe too), extended valuation levels or rising inflation. However, all of these concerns have been in the public domain for months, if not years now. They’re priced in. What we need to be looking out for are those things that aren’t in the public domain. What we actually don’t know right now. Surprises. Signals. Everything else is just noise. What surprises would be fairly disruptive right now?

The following come to mind:

  • Lower than expected 2Q earnings growth;
  • Downward revisions to 2H18 and full year 2018 earnings estimates;
  • A meaningfully larger than expected negative business/financial impact from proposed tariffs (likely related to bullet #2);
  • Some major turn of events that causes investor sentiment to do a 180 (could be a direct result of bullet #3, who knows?).

The funny thing is there really isn’t any way of knowing if and when any of the above will actually happen. We can handicap each potential concern, which we should most certainly do but beware of being overly pessimistic. There is already a lot of worry/concern in the public domain. It’s likely going to take a fairly substantial negative surprise to really knock the market off its current trajectory.

For now, the trend is still pointing in a favorable direction. Don’t let the day-to-day market swings and worries get you down. A well-thought out and executed investment plan coupled with a long time horizon will more likely than not be able to withstand any potential negative surprises.

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