Accentuate the Positive…

Mike Williams | 10th October 2017
Categories
Letter from America

Did you know that the vast majority, well above 95%, of the news we take in each day is, in a word, negative. 

We’re fed data and perspectives that drive worries about almost everything: money, economic issues, politics, terrorism, racial concerns, global events, nuclear bombs, energy wars, the Middle East, geo-political events and overall infighting across far too many fronts.

That’s the power of the headlines. 

But if you look beyond the negativity you’ll see that things are not that bad at all. 

  • Technology is changing everything, and most of it for the better even if a few things require we adapt to change.
  • America’s healthcare is (arguably) the best in the world.
  • The consumer base is fully employed, with many millions more jobs available for the taking once education and training catch up.
  • We have a limited supplies of inventory almost anywhere in the pipeline - making it very, very tough to even get a recession entrenched.
  • We live in a country that people still risk dying to get too....

Folks, history proves that fear is the investor's most significant cost in all of their investing and wealth-building goals.  

All Eyes on Deck

Yep, it’s corporate earnings time again.  

Let's be grateful that markets have generally had a steady upward slope to them for the last few weeks heading into the earnings season. 

As we saw last quarter, I would simply remind everyone that when this type of run-up occurs, you tend to see a bit more of the “buy the rumour, sell the news” garbage. 

That’s short-term trading, not investing.  

So let’s not be surprised to see some of that price action this time around as well. 

A recent seasonality report from Bespoke shows that October, November, and December have been the #2, #3, and #5 best months for the Dow Jones Industrial Average (DJIA) over the last 20 years.

Over the last 20 years, the DJIA has gained an average of just 1.32% in the first nine months of the year, but then it delivered a 5.46% average gain in the fourth quarter. 

The View

The latest from Thomson shows the trend is still solid, with a little bit of the ratchet prior to the earnings avalanche. The stage is set for beats (outside of the hurricane related events).

The big banks will kick off the Q3 2017 earnings season this week. 

But let's check the revisions for the Q4 2017 estimates by sector since July 1, 2017. 

Keep in mind that these are usually moved down:

  • Cons Disc: +10.1% vs. 11.8% as of July 1 2017
  • Cons Spls: +9.2% vs. +8.7% as of July 1 2017 (weaker dollar has to be aiding better growth)
  • Energy: +91.3% vs. +118% as of July 1 2017
  • Fincl's: +15.8% vs. +16.5% as of July 1 2017 (down some last 13 weeks - not much - and mostly trade rev related as warned by a few of the big ones)
  • Healthcare: +6.8% vs. +7.5% as of July 1 2017
  • Industrials: +11.9% vs. 15.7% as of July 1 2017
  • Basic Mat: +23.5% vs. +20.3% as of July 1 2017 (note the upward revisions)
  • Real estate: -0.2% vs. +0.5% as of July 1 2017
  • Technology: +12.3% vs. +10.4% as of July 1 2017 (note upward revisions)
  • Telecom: +0.5% vs. +0.9% as of July 1 2017
  • Utilities: +3.7% vs. +3.8% as of July 1 2017

And the S&P 500 overall: +12.3% vs. +13.1% as of July 1 2017.

Don't forget market weighting: Technology, Financials and Healthcare comprise about 53% of the S&P 500 by market capitalisation. Telcos, Utilities, Basic Materials and Real Estate combined are about 12% of the S&P 500 by market capitalisation.

For Q4 2017 estimates the sharpest upward revisions occurred in the Technology, Basic Materials and the Consumer Staples sectors. 

Worries over production issues around the Apple iPhone 8 or the hurricanes seem to have not (yet) impacted Q4 2017 estimates for the Tech sector. 

Pray for a correction folks.

And let’s accentuate more of the positives.