The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Bad Timing For A Normal Adjustment

12/22/2018

A bear market is usually measured by a 20% drop from its high.  By that measure, the NASDAQ companies are now in the dreaded bear market.  Even worse, the Dow and S&P are close behind.  Investors are understandably frightened.  First, this is not the end of the world.  The stock market will recover!

Never forget — corporate profits are “the mother’s milk” of stock prices.  For most of 2018, corporate profits were rising at a 20% annual rate.  A big part of that jump was the one-time “sugar-hit” from the cut in corporate income taxes.  For 2019, corporate profits are expected to rise a more normal 7.9%.  The stock market had to adjust to that change.  It was not adjusting to corporate losses, only reduced corporate PROFITS.

Unfortunately, this normal adjustment is occurring in a period of increasing uncertainty.  There is increased uncertainty about Washington, about rising interest rates, about Mueller, about Brexit, about Russia, and especially about the trade war with China.  A government shutdown in the middle of all this certainly didn’t help.

Real estate investors love times like this, when stock values are reported each day and real estate values are not.  Of course, we all know that real estate fluctuates in value as much as stocks on Wall Street, but it is invisible fluctuation.  If stocks reflect the economy, then real estate also reflects the economy.

Yes, stock markets and real estate will both recover, but not this week . . .

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