December 15, 2018

Friday was another negative day in the markets. The other side of that coin however, is that those with cash to invest can do so at lower stock prices.

The S&P 500 was down 1.9% and Toronto was down 1.05%.

The decline in the S&P 500 was blamed on worried about weaker GDP growth in China. I never claim to be able to predict short term market moves, but it seems to me that hat the U.S. market has been in a mood to look for reasons to go down. There are times when almost all news is interpreted as good news. As in “Consumer spending is down? Great ,the FED will not raise rates so stocks are a buy”. At other times almost all news is interpreted negatively. And there are reasons to for the market to worry about where U.S. stocks are headed.

The S&P 500 P/E is not particularly high, but it’s not that low either at 20 and is still pricing in earnings growth in excess of nominal GDP growth. Analysts expect earnings to grow another 12% in the next year. That’s ambitious on top of the 27% earnings growth that occurred in the year ended September 30 which was greatly boosted by the Trump tax cuts. So, there is absolutely room for the S&P 500 to decline just based on earnings growth returning to more normal levels. On top of that thee “yield curve” is suggesting a recession may be coming for the U.S. Then there are the trade tensions. And then there is the President’s huge issues with the Mueller inquiry which could certainly add to market fears.

The valuation of the Toronto Stock market is lower but certainly Canada could also face recession and has its own trade issues.

It is obviously disappointing to see a stock portfolio declining and especially when the declines get into the double digits. But these kind of declines are not unusual. Some stocks have declined because their earnings are down. But in most cases earnings have risen and it is the valuation multiples that have gone down partly due to higher interest rates but mostly due to fears of earnings decline due to recession or trade wars. If companies can continue to grow their earnings per share over time then the stock prices will recover.

Getting back to Friday’s markets:

Costco was down 8.6%. This was despite posting good earnings in its latest quarter. Costco is a very powerful and impressive company. But it trades at a very high P/E ratio and was vulnerable to decline for that reason.

Constellation Software was down 3.6% but remains up about 9% in 2018.

Amazon was down 4.0%

TFI International was down 3.4%. I have not seen any particular reason for the recent decline.

There are not very may stocks on our list that are close to their 52 week highs. Fortis is very close to its 52 week high (it had reached a similar high 13 months ago but then declined somewhat) and Starbucks is not far below its 52 week (and all-time) high.

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