The market had one of the worst days in 2017 so far. The DOW dropped %1.78, NASDAQ dropped %2.57, and S&P 500 dropped %1.82.
As terrifying as those red numbers are, this is actually a great thing for new investors. Stocks that are constantly reaching their all-time high have been affected by the larger movements in the market. Days like yesterday allow first-time investors to buy excellent stocks at a good time.
Whether you are investing with a fake-folio or investing with real money, the overall ‘market correction’ gives an opportunity for new investors to get great stocks at even better prices.
Why Did The Market Drop?
If you believe CNBC and CNN Money, the market dipped today as a response to New York Time’s article on Trump firing Comey because he would not stop investigating Flynn. This may be the true reason why the market declined, but you will never know unless you ask every major stock market investor. Typically, whenever the market faces a terrible day the blame is always placed on news not directly related to the market. The last time the DOW had a -1% day, the media blamed the dip on Trump dropping a MOAB (Mother Of All Bombs) on Syria.
Hate to break it to my readers, but the U.S. has been dropping bombs in the Middle East for the past decade. It makes little sense that the market is only affected when the person dropping bombs is Trump.
I believe the market dropped due to two reasons:
- Stock prices increased too fast and too far after earnings
- Earnings Season is coming to an end and Analysts are beginning to publish their expectations
It is very common for Wall Street to have mixed reactions towards an earnings report. Typically, when a company shows promising growth or growth that exceeds expectations, the result will be that the stock price will be inflated. The major market indices had a fantastic earning season this past month and it was only a matter of time before the Market faced a correction.
Analysts are the ‘Kings of Speculation’. You will see many analysts release BUY, HOLD, or SELL ratings for stocks in between quarterly reports from companies. I can’t count how many times these analysts are just flat out wrong but still manage to impact the price of a stock in a major way.
Just take this small example of a Nomura analyst, where he estimated Nvidia’s (NVDA) target stock price to be $90 and issued a sell rating. Currently, Nvidia is priced at $130. The price of Nvidia at the time of this report was $108. Any investors who listened to this individual and sold their NVDA shares missed out on huge earnings. NVDA stock prices dropped 8% that day to $100.78. If you ignored the Nomura analyst and bought NVDA after the dip, you would have made a quick %30 return in just about 6 weeks.
Romit Shah claimed that increasing competition and lagging PC sales were going to hurt Nvidia. He was wrong. Nvidia increased year-over-year sales by more than %50 and data center profits rose more than %300.
The point I am trying to make is that the market (and individual stock prices) move up and down for many reasons. The key is to take advantage of times where there are significant drops in price.
Strong Q1 Earnings Reports
FAANG (Facebook -3.29%, Amazon -2.2%, Apple -3.26%, Netflix -3.9%, Google -2.48%) is an acronym coined by Jim Cramer. These 5 stocks represent some of the strongest growth-based companies today.
If investing in the top tech companies doesn’t float your boat, then look up other stocks that you are interested in buying. There are many stocks that had great earnings reports, but dipped significantly today: (1) ETSY -7.21%, (2) Paypal -2.6%, (3) Square –3.94%, (4) Zillow -6.96%, (5) Shopify -10%, (6) EA Games -6.12%, (7) Activision Blizzard -5.13%.
No matter which stock you purchase, make sure you look at the company’s most recent earnings report (or past year’s worth of earnings reports) to ensure the company has a promising future. Typically, what I look for in a stock’s earnings report are:
- Revenue Growth – %10 is good, anything over %20 is outstanding
- Profit Growth – %10 is good, %20 is outstanding
- Cost Reduction – Make sure costs are not growing disproportionately as compared to revenue
- Future Outlook – Where does the company aim to be in 5 years? 10 years?
Many people may look at EPS (earnings per share), customer/user growth, and/or any other factor that may be important for a particular company. The key is to be comfortable with a company’s earnings reports before investing in that company.
Political Climate Does Not Impact The Stock Market
The market is not affected by the political climate in Washington D.C. (over the long-term). The prices of major market indices are not affected by what an individual tweets, even if that individual is our president.
Legislative change is a slow process and can have serious implications for certain companies. However, most of the companies that are affected by certain bills/laws have ample amounts of time to adjust accordingly. Take Apple’s CEO, Tim Cook, for instance. Tim Cook just announced a $1,000,000,000 plan to build manufacturing plants here in the U.S.
I am certain that this is a response to Trump’s “hire American, buy American” initiative. In order to avoid the tariff on internationally manufactured goods, Apple preemptively built a factory in the U.S. You can be sure that Apple will build this manufacturing plant before Trump passes any law that taxes foreign goods.
Whether you are trying to account for a corporate tax adjustment, healthcare reform, coal-based energies, or infrastructure improvement, I wouldn’t invest based on what politicians say they will do. It is very likely that a specific policy will not come to fruition or that companies will have accounted for changes in the legislature as turning bills into laws can take quite a bit of time.
Trump is not alone in his political goals not affecting the stock market.
Take Barack Obama’s 8-year term for example. Obama really pressed for green energy during his time as President. He was even investing tax dollars into renewable energy sources. All this effort placed on solar, wind, and water energy did not help these companies.
Take SunEdison Inc (SUNE), SunPower (SPWR), and America Wind Energy Corporation (AWNE) for example. All these companies are renewable energy companies focused on solar or wind power. These companies all rallied to their all-time highs once Barack Obama was elected President.
However, these stocks all suffered the harsh realities of having no profits. No matter how much our previous President pushed for renewable energies, these stocks got crushed in the past 8 years.
As much as the media disagrees, the president has very little control over how the market behaves. I wouldn’t short Mexican avocados and Corona just because Trump says that he will have Mexico pay for a wall. In the same sense, I wouldn’t invest in renewable energy companies even if the President of the United States is pushing for green energy.
At the end of the day, investing in a company should be about investing in the fundamentals of the company and not how a particular company will perform with a certain president.
The three reasons why you should invest today:
- Market ‘corrections’ are typical and a great time to buy stocks. Everything is on sale!
- Earnings reports were incredibly strong for several companies.
- Political climate does not affect the value of a stock.
If you think of any other reasons, put them in the comments! Don’t forget to share, like, and subscribe!