“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”
The current turmoil in the stock market has driven many investors away. Since 2022, the Nasdaq has been down 24%, and the S&P 500 has dropped nearly 20%. (Source: Investing.com) It seems like the stock market's performance has proven the adage" Sell in May and go away" to be true. However, investors should value the opportunity that arises from the recent downfall.
The U.S. economy:
There are multiple factors contributing to the stock market’s bad performance. For one, the United State’s GDP has decreased for the first time since quarter two in 2020, causing investors to fear and panic. But if we expand our time frame, we can see that one minor disruption in some quarters can hardly change the U.S. GDP’s uprising trend. The increasing trend is still steady in situations where the GDP dropped by 2.5%(in 2009). (Source: Macrotrends) There is no need to be scared of a minor decrease in one quarter as the economy has recovered and grown based on historical patterns. Looking at the graphs below, the U.S GDP has fluctuated over the years as the U.S experienced the Cold War, Dot Com Bubble, and the 2008 Financial Crisis. However, the decrease of GDP when these crises happened is insignificant as the graphs show that the GDP eventually recovers.
Some may still fear and panic about some companies’ slow growth. For example, Amazon’s operating income decreased to $3.7 billion in the first quarter, compared with $8.9 billion in 2021. There was also a net loss of $3.8 billion in the first quarter, or $7.56 per diluted share, compared with a net income of $8.1 billion, or $15.79 per diluted share, in the first quarter of 2021. Other blue chip stocks such as Walmart also experienced a slow down. Walmart’s net income for the quarter fell to $2.05 billion, or 74 cents per share, compared with $2.73 billion, or 97 cents per share a year ago.(Source: Walmart)
However, we need to view these problems in the current context. With inflation rising, it is natural for many households to save money and purchase cheaper items since they are not receiving any stimulus checks. Furthermore, grocery stores like Walmart face increasing supply chain costs that are taking a bite out of their earnings. Walmart’s inventory also increased by 33% as it made aggressive buys to get ahead of inflation and make sure items stayed in stock. (Source: CNBC) The uprising logistic costs and aggressive buys are caused by inflation and supply-side disruptions under the pandemic, which will most likely resolve over the long term. Therefore, we shouldn’t think the future of Walmart is gloomy just because of one quarter of bad performance caused by the current economic environment.
Furthermore, the average lifespan of a company on the Standard and Poor's 500 Index is 21 years, which is 84 quarters. (Source: Statista) One-quarter of bad performance only constitutes 1/84 or 1.19% of a company's lifetime, which is unlikely to change a company drastically. Furthermore, a firm's present value is determined by the cash flow it will generate in the future discounted to present. As previously mentioned, bad performance in one quarter is unlikely to change a company permanently. Therefore, Walmart's ability to generate long term future cash flow is improbable to be negatively impacted.
Let’s take a look at Walmart’s stock price since it went public. Although there were seemingly major downfalls at certain periods, Walmart rebounded strong and established a steady upward trend. Additionally, looking at Walmart’s earnings per share (EPS) for the past twelve years, we can observe that its EPS is quite constant, and rebounded strongly after minor decreases.
A similar situation is also happening to Amazon. The pandemic and subsequent war in Ukraine have brought unusual growth and challenges to Amazon in early 2022. Furthermore, Amazon has been navigating a host of economic challenges, including rising inflation, higher fuel, and labor costs, and global supply chain snarls. However, whether it is the pandemic or inflation is unsustainable in the long run.
Looking at Amazon’s past stock price and EPS, we can see Amazon is growing rapidly and steadily, surviving crises such as the Dot Com Bubble and the 2008 Financial Crisis. Ultimately, what drives a company’s growth is the company's long term fundamental value. As we can see, Amazon's stock price is increasing in response to its increasing EPS.
In conclusion, Investors should always focus on the fundamentals of a business as that ultimately drive the stock price of a company over the long term.
By: Siddharth Singhai and Yang Peng
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The views and strategies described may not be suitable for all investors. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.