A BAD REACTION

     Sometimes two different things just don't mix. This recent market action reminds me of the time I went camping down in Kentucky with disastrous results. I had taken a prescription medicine for my stomach problems before I left the house. When I got to camp, I started drinking wine instead of eating any supper. About 2:30 am I stood-up to get some wood for the campfire and did a face-plant right into the fire. After rolling out of the fire, I fell flat on my face, breaking my glasses and my nose. The next morning I woke-up with black eyes, a burned face and a pounding headache. Alcohol and drugs are a volatile combination. After yesterday's 600 point drop in the Dow industrial average, my take is there were a couple of things that caused this nasty reaction. First up is the uncertainty of the results of the mid-term elections. As expected, the House of Congress has a new Democratic majority. Wall Street is nervous about how this will effect Donald Trump's agenda. A divided government may result in grid-lock which means little can be achieved. Another ingredient for market unrest is increasing interest rates. Higher rates is not a new story, but at some point the market will react badly when the higher rates are perceived as a detriment to stocks. Not only do higher rates increase borrowing cost to corporations, they also give investors an alternative to stocks in the form of fixed income investments. Any reductions to earnings is considered a threat to stocks. If those two factors weren't enough, a third ingredient has roiled this market-the trade war with China will hurt many multinational corporations, especially technology companies. At the same time these factors were weighing on investors nerves, oil was doing its own face-plant into the fire. Add it all up and the market reacted by puking-up half it's gain for the year, leaving the Dow up only 2.7%. Now for some good news: corporate earnings are up this year by some 30% year over year thanks to the Trump tax cuts, consumers are generally in good financial shape, interest rates are still relatively low, and I'm waiting for the annual Santa Claus rally. Bottom line, stocks are still the best option for long term investors especially now that they are even more reasonably priced.