Image courtesy of Christine Wagner on Flickr, under CC license  

The market swings of April 2018 gave us the very definition of volatility. Certainly there were a number of factors involved, but the reality is that analysts and participants may have gotten ahead of themselves as the market rocketed forward in the last quarter of 2017 and the early weeks of 2018.

In hindsight, their optimism was understandable given the extraordinary stimulus laid on top of a well-established economic expansion. With so much momentum and recent wins, investors were following the herd upwards without a sense of rational grounding. They may want to check their symptoms against the “Disease of More,” a phrase coined by Los Angeles Lakers coach Pat Riley in the 1980s to describe the loss of his players’ focus following a championship season.

“After you’ve had some success, you want more, more, more,” said Riley. “I call it the disease of more, but what you get is less of what you did to help the team. Once someone gets too far away from the pattern, you got to bring them back in.”

Throughout early 2018, analysts consistently raised their earnings estimates for the S&P 500, and investors followed their lead by pouring money into equities. The market legged up in a chase for even higher returns after a blockbuster 2017 during which the S&P 500 delivered better than 21% in total return.

When estimates for earnings growth leveled off, however, many of those same investors who were so eager for more may have realized that, like Pat Riley’s Lakers, they had lost track of fundamentals, and the market corrected.

We are now entering a phase when we will likely see a deeper divide between winners and losers. We will learn more about just how strong the global economy may or may not be. We will begin to see data that will help us sort the companies experiencing real revenue and earnings growth from those that are manufacturing growth on paper with earnings adjustments based on policy promises. And, once again, as in most periods of consolidation and correction, fundamentals will matter.

For more insight into Q1 2018, please read our Long Run quarterly newsletter.

DISCLOSURE: The opinions expressed are those of Reynders, McVeigh Capital Management, LLC as of the date referenced and are subject to change at any time based on market or other conditions. Certain statements may be deemed forward-looking, but any such statements are not guarantees of any future results and actual results or developments may differ materially from those discussed.