Markets

If You Are Confused By This Market, Here's The One Thing You Should Know

Stock prices increasing and decreasing in value
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The current market can be mystifying at times. It seems that every move, both up and down is massively exaggerated, but if you understand one simple thing, it all makes sense. “Value” in the traditional sense of the multiple of a company’s earnings is now as good as irrelevant: Growth is the only thing that counts.

Traders and investors who have been around for a while will know that these things, like so much in investing, tend to move in cycles. In the early stages of the recovery from the recession, value was everything. The events of 2008 and 2009 taught us that growth could be an illusion and that what mattered was cold, hard cash. Once valuations caught up with averages, however, the value analysis that had served so many so well on the way out of the depths became less useful.

Thus, a few years ago, a shift began towards growth stocks. By the beginning of this year, that shift was just about complete. Companies that make an enormous amount of money and pay good dividends, companies like Boeing (BA), had done well on that basis, but stalled as 2018 began. That stock peaked at around $350 a couple of weeks into January and has gained only around three percent since.

There are plenty of other examples, too. In the tech sector, companies like Oracle (ORCL) keep posting good numbers but have stocks are lower than in January. Financials, both individually and as a sector, continue to underperform And despite a sustained recovery in the price of oil and consistent profitability, a lot of energy companies’ stocks are still significantly lower than earlier this year.

I am sure that shareholders in Exxon Mobil (XOM) and Chevron (CVX), or Bank of America (BAC) and Citi (C), can’t wait for the cycle to shift and quaint, old-fashioned things like profits to come back into vogue.

At some point, of course, they will, but that doesn’t mean that investors who take an active role in managing their own money, nor of course traders, should simply buy the out of favor stocks and wait for that to happen. Going with the flow and dedicating at least part of your portfolio to stocks with P/Es (Price to Earnings Ratios) that are in the stratosphere or, in many cases, non-existent because there is no “P,” is risky, but the potential rewards so high that it is a risk well worth taking.

There is another side to that coin too. In the current market, just because something has shot up in recent months, often beyond the logical endpoint, that doesn’t mean that it can’t move higher still. People have been pointing to AMZN’s triple digit P/Es for a long time as a reason to sell, yet here we are, up over 65% year to date. Even those that should know better often think that strong performance must come to an end.

When I wrote a few weeks ago that Tilray (TLRY) would continue higher despite quadrupling in less than a month, many were vehemently incredulous. The pot stock “expert” quoted in that article as suggesting a short even trolled me briefly on Twitter, but TLRY is up over 150% in the three weeks since. I try not to feed the trolls, but for him and the other doubters I have one question. In the dealing room vernacular, “How you left?”

When you look at stocks in the current market and their over or under performance seems illogical, you should ask yourself a question. Are you judging them by criteria such as value that are currently out of fashion? If that is the case and you can bring yourself to ignore the most fundamental metrics used to evaluate a company and focus only on growth and growth potential, the seemingly illogical price will make perfect sense.

You will understand that laggards don’t have to catch up any time soon, and high flyers can still be a long way from crashing to earth. That is why an understanding of the shift to growth is important for investors right now. It will change at some point, but until it does, riding the wave, with appropriate stops to mitigate the risk to some extent, is all you can do.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio