Over the last week, the U.S. equity markets have experienced an increase in volatility. The VIX, which is known as the “fear index” spiked up from 12 to about 25 in a very short period. CNBC Asia, turned to Robert Luna, Surevest CEO & Chief Investment Strategist for answers.
It was a busy and volatile week on Wall Street. Many of the S&P 500 companies reported great Q3 earnings, but despite the good news, the U.S. markets tumbled. So far about half of the companies have reported with an average YoY sales growth of 8.13% and YoY earnings growth of 22.75%. So why have markets decreased?
“Markets are emotional and largely driven by investor behavior over the short term,” said Robert Luna, CEO and chief investment strategist at Surevest. “We believe the behavior is now beginning to focus more on current probability vs. future possibility.”
With the decrease of the S&P 500 this week, valuations for the U.S. markets are becoming more attractive. Looking at the forward 12 – month P/E ratio, it is now sitting at levels that we have not seen since 2016.
On CNBC Closing Bell, Robert commented on the importance of not forgetting how valuations play a significant part in the outcome of an investment. “I’m always afraid to say despite valuations, I think valuations matter a lot” said Robert when discussing the earnings report for Microsoft. He goes on to say, “Stocks don’t go down because they are bad companies, the S&P 500 is not down today because there are 500 bad companies, it’s just that at these prices and the type of environment that we are in [valuations matter] …”
Until now, the market has been led by companies with a negative or zero net shareholder yield. We don’t think that is sustainable over the long-run especially with continued volatility. Timing is always tough, but our view is that a lot of the profits in speculative names should start to be distributed to the under performing areas of portfolios, such as interest rate sector stocks as well as foreign markets.
“The days of stocks trading like a commodity are over. As we see normalization in policy, companies will begin to stand on their own merits and we will have winners and losers,” said Robert. “Superior stock selection and risk management have been inconsequential for nearly a decade. We think this is going to change and reward investors who do their homework.”
If you missed Robert’s appearance on CNBC Closing Bell, here is the link to tune in.