Hopefully you are enjoying your Labor Day weekend with the knowledge that your stock investments have done well so far this year. Through the end of August 2018, the S&P 500 has gained 9 percent and the Russel 2000, which is comprised of smaller companies, is up 13 percent. If you are wondering why the market has been doing well, the reason is very simple. Earnings. U.S. companies fueled by the recent tax cuts have been reporting tremendous sales and profits.
Tax cuts, foreign threats, potential military conflicts, terrorism, huge national debt, political strife, talk of impeachment, trade wars are all things that make investors nervous. Ultimately however, the price of stocks will always be based on a stock’s anticipated profits. The stock market constantly discounts all new information into the current price of all stocks. Any time there are reports of news that is likely to adversely affect corporate earnings, stocks will go down and news that will likely cause earnings to rise will make stocks go up. According to the Wall Street Journal, small stocks had 35 percent earnings and 10 percent sales growth from a year earlier and the stocks in the S&P 500 saw earnings and sales increase by 25 percent and 10 percent respectively.
One threat to corporate profits is a prolonged trade war. Last week there were reports of progress in trade negotiations between Mexico, Canada and the U.S. That news bodes well for corporate profits which contributed to a good week in the markets. As long as the economy stays strong and corporate profits keep growing stocks should continue to rise. Ultimately there tends to be business cycles which include economic recessions. The tax cuts may have delayed an inevitable recession but as soon as the market senses the next recession on the horizon, the markets will react accordingly. However, as long as corporate earnings keep growing stocks should continue to do well.
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