The No.1 Problem Most Traders Have

At times, we forget to see the forest for the trees.

Even though market chaos erupted over Syria and fears of a trade war in early 2018, we often forget that markets are quite resilient, especially when the economy is still strong.

We witnessed this in early 2018.

For one, corporate America was still doing very well with earnings as proof.

Banks, for example, came out swinging for the fences, as Citigroup beat earnings with EPS of $1.68, as compared to $1.61 expectations. JP Morgan beat on both the top and bottom line with earnings of $2.37 on revenue of $28.52 billion.

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Wells Fargo beat with EPS of $1.12 as compared to $1.07 expectations on revenue of $21.9 billion, which also beat expectations for $21.7 billion. Even Goldman Sachs reported better than expected earnings and revenue for the first quarter, boosted by a 38 percent jump in equities trading revenue.

Then, Netflix posted in-line EPS of 64 cents, which met expectations on revenues of $3.7 billion, as compared to expectations for $3.69 billion. The big news for NFLX was its addition of another two million U.S. subscribers, as well as guidance for EPS of 79 cents, as compared to expectations for 65 cents.

"The Q1 earnings season has started solidly," said Jeremy Klein, chief market strategist at FBN Securities, as quoted by CNBC. "Corporate executives have not only easily beaten extremely aggressive top and bottom line estimates in aggregate but have also spoken effusively about their business prospects. Nothing matters more for the health of the rally than the ability of companies to churn out profits."

Forcing earnings higher were catalysts such as solid U.S. and overseas economic growth, as well as from the new tax law.

In fact, according to LPL Financial:

“Earnings estimates for the first quarter have increased by about 6% so far this year, due almost entirely to the Tax Cuts and Jobs Act increase was the biggest ever (according to data from Ned Davis Research) and is about 10% better than the average quarterly change of a 3–4% decline. The reduction in the corporate tax rate is the biggest factor; however, individual tax cuts, incentives to encourage capital investment, and repatriation of overseas cash could have driven some of the increase as well (and may offer the potential for a future boost).”

At the time, we were also seeing stronger manufacturing activity, and a weaker dollar, which increases overseas earnings for U.S. based multinational companies. 

We were even seeing strong growth in unemployment, too.

The U.S. economy may have only added a third of the jobs it did in February, but that’s okay.

The economy was on solid ground with its 90th consecutive months of job gains.

In fact, unemployment stood at 4.1% with a labor force participation rate of 63% – a measure of the number of people who are working. After an eye-popping addition of 326,000 jobs in February, the addition of just 103,000 jobs may have sounded disappointing as a headline number.  But consider this.

On average, the U.S. added 188,000 jobs every month in 2017. 

“We’ve had such unsustainably strong results in January and February that it was largely expected that we were due for some payback,” said Ellen Zentner, chief United States economist for Morgan Stanley, as quoted by The New York Times. “The weak number in headline payrolls does not change the fact that trend job growth is strong.”

In short, we panic over noise. 

We fail to see the bigger picture, and typically forget to see the forest for the trees.

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