Reasons To Be Pumped About Stocks

Reasons To Be Pumped About Stocks

over 4 years ago3 mins

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Third-quarter earnings are firmly behind investors, who are now looking forward to the end of the year. And, in a brisk about-turn from their earlier skittishness, they’re feeling pretty positive.

🕰️ Recap

  • Investors buying government bonds for fear of an impending recession led to a dreaded yield curve inversion in the summer
  • Yet stocks rose to record highs as companies reported better-than-expected quarterly updates
  • A more positive mood among investors last week led them to sell off precious metals like gold and silver, which tend to do well in times of uncertainty
  • And this week, analysts concluded that the last few weeks of 2019 would bring stock markets holiday cheer

🔗 Connecting The Dots

Companies’ quarterly updates are always highly anticipated by investors: they’re an opportunity to peer behind the corporate curtain to see whether firms are doing as well as they promised – and to reassess whether an investment is worth hanging on to. And when lots of investors make those decisions at once, it can result in some pretty dramatic stock price swings.

A company’s quarterly profits do matter, insofar as its earnings tend to move in the same direction as its stock price over the long run. But it’s not entirely clear that an individual quarter matters all that much. According to some analyst research, there isn’t a strong relationship between a company’s stock price and its quarterly earnings. Even a company that “surprises” investors with new, unanticipated information doesn’t, on average, tend to see its share price immediately track the company’s earnings.

What then, you may wonder, does affect stock prices in a given quarter? The answer appears to be interest rates. Lower interest rates, for instance, make safe investments like government bonds appear less attractive, and risky ones like stocks more-so. Investors, then, might buy up stocks irrespective of a quarterly update because, on balance, the potential reward outweighs the increased risk. So while earnings remain important in the long run, they matter much less over short periods.

🥡 Takeaways

US and European stock markets hit record highs again this week, and some analysts expect the rise to continue before the year is out. They’re hopeful the mooted lower tariffs between the US and China will become a reality, and think a US economy that’s healthier now than it was six months ago means stocks will rise anyway. Goldman Sachs, for one, thinks the party will continue into next year, with a further 10% gain in US stocks up for grabs.

Superstar investor Warren Buffett and the CEO of JPMorgan Chase have called for US companies to stop telling investors what to expect on a quarterly basis. They believe it results in too much focus on short-term objectives, possibly at the expense of long-term growth and business sustainability. In France and the UK, for example, companies give a full report to investors twice a year, plus two shorter updates. Other investors, on the other hand, worry this could encourage people to rely on rumors and hearsay instead.

🎯 Also On Our Radar

Netflix’s streaming rival Disney+ launched in the US, Canada, and the Netherlands this week, and it reportedly signed up 10 million users on its first day. Of course, most of those are on free trials, so there’s no guarantee they’ll all stick around. But considering analysts had predicted Disney+ would have just 8 million users in its first year, Disney’s investors are understandably excited. Netflix’s, though, might be starting to get a little worried…

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