CHICAGO — After a booming 2017 on Wall Street, the
volatility that the markets have shown so far in 2018 is not unusual, said
James Valentine, a clinical professor of finance in DePaul University’s
Driehaus College of Business.
Valentine has spent his career researching the stock market,
serving as an equity research analyst in both the U.S. and Europe. He is the
author of “Best Practices for Equity Research Analysts,” and started
AnalystSolutions, which helps analysts and prospective analysts improve their
stock picking skills. At DePaul, Valentine is the executive director of the
Driehaus Center for Behavioral Finance, which aims to teach business students
about aspects of this type of finance, assist faculty members with research,
and educate practitioners about the most common pitfalls when investing.
In this Q&A, Valentine explains the recent volatility in
the market, how new tariffs affect it and what people should know before
Q: Why does the
threat of a trade war affect the market so much?
A: The reality
is, in a trade war there are going to be some companies that are winners and
some that are losers. Initially what’s going to happen is you’ll see a
dislocation of capital. For example, if an aircraft manufacturer were to get impacted
by the trade war, it would have plants with excess planes that aren’t going to
be needed, so their stock would do poorly. However, presumably the stocks that
are winning part of the trade war, let’s say, steel companies, would benefit.
Nevertheless, it takes time for the assets to be re-allocated to the right sectors.
Q: Why has volatility
increased in the last few months following a period of steady growth?
A: With the
Federal Reserve starting to tighten, interest rates beginning to rise, and inflation
potentially coming into question, it's creating some unease in the marketplace
relative to the euphoria we've had with the stock market since the November
2016 election. Higher inflation can be a good sign the economy is recovering,
but it has a darker side in that corporate borrowing costs rise, which creates
a drag on corporate earnings growth.
It’s also worth noting when interest rates rise it offers alternative
investment opportunities for investors. As the investment appetite shifts from
stocks to bonds, it has a negative impact on the stock market. Even though there
are some forces working against the stock market, valuations are near 30-year
highs, excluding crazy high levels during the internet bubble of the late-1990s.
Q: What else can
cause the stock market to go up or down?
A: Put simply,
the stock market moves in the direction of expected corporate earnings growth
and therefore anything that is likely to boost or impede corporate earnings is
going to affect the market. Sometimes these events can be forecast with some
level of accuracy, such as labor inflation. Others are completely unpredictable,
such as natural disasters, election upsets and terrorist attacks.
Q: What do people
need to know and consider when they are looking to invest in stocks?
speaking, you need to understand the risk level that you're taking on. Some
investments are typically more volatile than others. Volatility and risk go
hand in hand. Before you invest in anything, you need to understand the
historical risk and if it’s likely to change in the future.
When deciding to put money in the stock market, it all comes
down to considering your long-term objectives. Generally speaking, stocks are
the best long-term performers among the major asset classes. But be careful
about trying to time the market, because it has been proven time and time again
that this is almost impossible, even for the most savvy investors.