A Bull Market in Pessimism

Mike Williams | 10th April 2019
Categories
Letter from America

“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
- Warren Buffett

The earnings season is dead ahead. 

Even as we collectively continue to brush the emotional dust off all the fears echoed in the Q4 data, the next quarter's results are just a matter of weeks away.

And the masses are doing what they’ve done for ten years now; worrying. That’s despite the fact that the markets are back within a couple of percentage points of the old highs.

So, what should those outside the terrified horde expect to happen?

Well, don’t be surprised to see some chop here. The fight over this particular line in the sand could likely be significant. 

Let the media machine belch out its panic to those eager to inhale it. The smog will come in many forms, like:

  • The yield curve and its shape described in agonising hourly detail.
  • The Brexit joke (Part LXXVII)
  • Border walls and judgement calls.
  • Yo-yo earnings.
  • The Mueller report on Russians and US elections (Part XXVII)
  • Interest rates blah, oil price blah, China/US negotiations blah…

This stuff is getting old, folks, so let’s try some fact over fiction:

Earnings

S&P 500 Weekly Earnings Data: (Source: IBES by Refinitiv):

  • Forward 4-quarter estimate: $173 vs. last week's $167.20.
  • PE ratio: 17x.
  • PEG ratio: 2.70x.
  • S&P 500 earnings yield: 5.98% vs. last week's 5.90%.
  • Year-over-year growth of forward estimate 6.7% vs. last week's +2.6% (will be explained shortly).

Note the jump in the forward 4-quarter estimate to $173 is driven by the roll to the next quarter - looking forward.  It now includes Q2, 2019 through Q1 2020.  Also note that the 4-quarter trailing estimate now includes Q2, 2018 through Q1, 2019.

Expected earnings growth for Q1, 2019 per the IBES data is -2.2% for the S&P 500 as a whole, with Technology, Materials and Energy falling 6%, 15%, and 20%, respectively, while Health Care is expecting the highest year-on-year growth in sector earnings at just 4.5%.

Now, here’s how the next 5 quarters look for S&P 500 earnings growth (we can expect the farthest out to be shaved somewhat, as is normal):

  • Q1, 2020: +15%
  • Q4, 2019: +9.0%
  • Q3, 2019: +2.7%
  • Q2, 2019: +2.8%
  • Q1, 2019: -2.2%

This will begin to get a little sloppy for the reporters, so don't get too stressed over messy numbers. 

We need to remember that the S&P 500 laps the tax cuts for the first three quarters of 2019 and then laps the earnings softening in Q4 and Q1, 2020 (explaining the bump in the later numbers above).

We suspect the improving internals - and still strong jobs growth - provide a hint that Q1, 2019 is more likely to be the low-water mark for S&P 500 earnings growth this year.

Jobs?

Pretty solid, actually, with low inflationary pressures and signs that last month's "horrible" report was indeed not a sign of doom but far more likely the government shutdown working itself through the numbers.

Along with the 195,000 new jobs, the US added 20K or so to the last report in an upward revision.  We suspect there will be another upward revision as the government continues to catch-up from the noted shutdown.

And the good news about that report was that low inflationary pressures have left the experts and the US Federal Reserve scratching their heads.

Note again:  Generation Y is set to represent the most deflationary force we have seen yet in the economy's evolution. This is good news so don't fret.

After all - the constant chatter about rising rates turned out to be dynamically incorrect, so too will most of the fear-mongering we are seeing today:

US mortgage rates take biggest dip in a decade

  • The average 30-year fixed-rate mortgage drops 22 basis points in the past week, its biggest drop in more than 10 years, according to Freddie Mac's Primary Mortgage Survey.
  • "The Federal Reserves's concern about the prospects for slowing economic growth caused investor jitters to drive down mortgage rates by the largest amount in over ten years," says Freddie Chief Economist Sam Khater.
  • 30-year FRM averaged 4.06% for the week ending March 28, vs 4.28% in the previous week and 4.40% a year ago.
  • 15-year FRM averaged 3.57% vs 3.71% in the prior week and 3.90% a year ago.
  • 5-year Treasury-indexed hybrid adjustable rate mortgage averaged 3.75% vs 3.84% in previous week and 3.66% a year ago.

Now, I’m not sure how many people bought into the junk science in the press over the last 18 months about interest rate "pressures."

But for those who did their wealth was being wealth poached by scare tactics designed to make your well-planned time horizons move from years to mere minutes.

We’re all human and thus can be impacted by the constant flow of hype, but we must find ways to exclude it from our thinking.

By the way, rates are where they were almost 5 years ago, and the world is still ticking:

Why Is the Media So Wrong?

Ever wonder why long-term reality always seem to go against the grain of all the short-term perspective garbage being reported?

Think about: How come the markets have bounced back from what was literally a self-induced panic attack in Q4?

How come it seems we fear every headline?

Well, mainly it’s because the media overlooks the good…because “good” doesn’t sell newspapers as well as “bad.”

Why is S&P 500 only 2.3% away from new highs?

Because LEADING data is improving:

  • March ISM manufacturing > 55
  • NYSE A/D line at an all-time high
  • New home sales highest in a year
  • Michigan Consumer Confidence 5 month high
  • Leading Economic Index at an all time high

There is another bull market running strong.

Check out how much higher it is today versus when the crowd was terrified at the start of 2016, noted for all to read as "the worst start in 80 years....":

Like we’ve said for years and years now; the bond market is the fear trade. 

The only fear trade with a bigger reading is cash in the bank, which now stands at a high of $14 Trillion held by US consumers. 

Quantitative Easing (QE) was not about printing money, which is why we never perished in a fiery "inflationary storm" that so many experts warned us about.

Nope. QE was the most vastly misunderstood financial process of our time. It was all about the demand for cold hard cash; getting and keeping cash in the bank no matter what the impact on its value.

There simply was not enough cash to satisfy the raving fears back in 2009, and it has done nothing but grow ever since.

Our fears have caused this "slow recovery" that we have been so afraid of...