Market Commentary October 16, 2004

The Wall Street Journal called yesterday’s stock market action a “fear-fueled frenzy” which is a pretty fair assessment. And it’s in this kind of market in which future fortunes can be made.
Fear causes people to act irrationally. In the words of the poet Rudyard Kipling in his poem titled:

If you can keep your head when all about you
Are losing theirs and blaming it on you,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!

Wild swings in the market are almost always caused by panic. Often by people who have made big bets such as hedge funds and other short term players bailing out of money losing trades. This has the effect of making the mom-and-pop investors who are in it for the long term nervous. That’s where keeping your head while others are losing theirs pays off.

Over the longer term markets follow earnings. Consensus estimates for the S&P 500 are expected to rise 11% in 2015. These estimates are subject to change but they indicate a trend that favors the investors who stay the course.

We are in the midst of “earnings season” and here is a representative sampling of companies who reported today:
Goldman Sachs beat estimates by $1.36 per share.
Baxter beat by 5¢
Baker Hughes missed by 12¢
BlackStone missed by 6¢¢
Delta Air beat by 2¢
Fairchild Semiconductor beat by 7¢
Fifth Third Bancorp missed by 4¢
Procter & Gamble beat by 7¢
Briggs & Stratton beat by 17¢

We are not recommending the purchase or sale of these stocks, simply noting that six out of nine major companies are actually reporting better earnings than analysts expected. When will the current panic pass? We don’t pretend to tell you. But we are confident if we do our job and create well diversified portfolios we’ll do well over time.

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