Market Commentary

Oil- Current State of the Market

A comment on the current state of our stock market:

When we invest in stocks for clients, we are essentially paying for a future stream of earnings of companies discounted to today’s dollars. We want to have as much confidence in the stability and growth of the future earnings of those companies as possible. Any global trends which have the potential to negatively impact earnings flow on a broad scale will disrupt the market price of common stocks. The approximately 70% decline in the price of oil over the past year is one of those global trends that is currently affecting common stock prices.

The drop in the value of oil is a double-edged sword. On the positive side, many of our oil-based consumer items as well as gasoline will be much cheaper for the consumer. However, on the negative side, oil is now at a price where many smaller producers cannot make money and are forced to make layoffs or shut down completely.

Sixty years of investing on behalf of clients has taught us that while markets are cyclical and global trends affect market behavior, it is ultimately earnings growth that drives long term stock prices. After a strong six-year bull market from 2009 through 2014, the equity markets have experienced downward pressure since May of 2015. Whether this decline in equity prices is a much needed market correction or the beginning of a bear market is not yet apparent.

What is apparent is that the drop in oil prices has been one of the main catalysts for the market decline. We also know that this will pass in time and that stocks will once again get back to reflecting their future earnings, until we face the next major global trend.

Sincerely,

Alison J. Gamble, President
Gamble Jones Investment Counsel

Thoughts on Market Timing

When we were grinding out our financial education, each of us had professors that explained how market timing was rarely successful. The problem is that the trader has to make two correct decisions: when to get out of the market and when to get back into the market. The truth is that on average we would be better off being invested during bear and bull markets. Part of this statement comes from the simple fact that it is difficult to time the end of a correction and the beginning of a bull market. Or vice versa. William Sharpe found that market timers must be right 82% of the time just to match the returns realized by buy-and-hold investors.

Think back to March of 2009. In the midst of financial meltdown and pundits’ warnings of imminent doom, who knew the market would turn on March 9th, running up over 20% in 15 days and initiating one of the greatest and prolonged bull markets in the history of the U.S. stock market?

A study by SEI Investments reviewed all the bear markets since World War II. According to the study, stocks rose an average of 32.5% in the 12 months following the bear-market bottom. Yet, if the bottom was missed by seven days, that return fell to 24.3%. How much would we miss out on if an investor has been stung by the previous drop and has not reinvested for two months? Three months?

Even though the markets have been gyrating over interest rates, China, and even presidential candidate bandwagons, keep in mind that we have invested in quality companies. These companies create value by earning a cash return on equity capital that exceeds their cost of equity capital. This excess return translates into bigger dividends and a higher stock price. We feel these companies can weather the storm of market uncertainty and provide growth in a variety of economic environments.

We do thank you for the trust you have placed with us in managing your assets.

Sincerely,

Alison J. Gamble, President
Gamble Jones Investment Counsel