How to Build Your “Ignore the Media” Muscle

So, eh, you might say the markets had quite a year in November!

Many experts were caught off guard – all those the naysayers can be overpowering if we let them.

The Good News?  

We will get plenty of practice building our "ignore the media" muscle.  As much as I would like to suggest the news stream will get better with the approaching new dawn of 2021, I'd be lying to you. 

In fact, we should be even more prepared now because whatever monster comes after COVID will sure need to be a big one to move the attention needle.

The Better News?

Oddly enough, while the news tells us the world is still ending, the economy seems to keep finding its next step forward.  

With a gain of just over 1%, the S&P 500 is already having a decent month. And if the seasonal trend that we’ve noted is any indication, the second half of the month should even be a little better.  

That said, keep in mind our reference to a January pause.

That’s shouldn’t scare you. 

Check out the chart below from our little seasonality tool that Bespoke provides.  

It shows the median historical one week, one-month, and three-month performance of the S&P 500 over the last ten years. 

In terms of the one-week and one-month performance readings, the median gains of 1.2% and 2.93%, respectively, both rank above the 90th percentile. 

Looking further out over the next three months, the S&P 500's median gain of 4.06% is still impressive but doesn't rank quite as strong in the 79th percentile.   

This would explain the other seasonal issue we covered last week - that January after a solid year - can present a pause and short-term traders book profits - and then hand stocks to long-term investors at better prices:

Once again, this is short-term data so don’t stress too much.

Earnings Data Update

It’s crazy to think that we are about five weeks away from the next earnings season already.  

Analysts remain terrified of upping estimates for the Q4 look back - even as the expectations have been crushed in the recent two quarters, with companies beating estimates over 90% of the time.  

Expect at least 70% beats for Q4.  

Here’s the latest:

• The forward 4-quarter estimate rose again this week to $160.66 versus last week's $160.40. 
• The S&P 500 earnings yield using the forward estimate is 4.39% this week, versus 4.34% last week. This was the first sequential increase in the S&P 500 earnings yield since the month of October, and probably due to the fact that the S&P 500 fell 1% during the week. 
• The Nasdaq Composite fell roughly 69 bps on the week, while the QQQ fell 1.2% the last five days.

However, there are more important points to consider.

For instance, why would analysts remain so nervous about raising estimates?  

Well, even though 11 years have passed between the Great Financial Crisis lows in March of 2009 and the COVID waterfall, analysts have never caught up. They remained roughly 50% short in their estimates. Pre-COVID, it was the norm to see 50%+ beat rates.  The bottom line here is that Q4 2020 EPS estimates are likely still too low.

The analyst pattern has been clear all during Covid; missing a big upside number is not nearly as fatal to an analyst's career as missing a big downside surprise.

The larger picture brewing for 2021 and beyond is also simple. The Digital Revolution will drive higher margins and more tech investments across the entire corporate landscape.

The quarterly estimates for calendar 2022 won't start being published by Refinitiv until April 1, 2021.  I bring this up because for calendar 2022, the estimate started out at $200 on April 1, 2020.  

Oddly, it didn't get revised too much lower from March through July, hitting a low of $186 and change.  

And now it’s back to $197+ already. 

Given the track-record of the analyst community, expect this to be way off base by late summer of 2021. It would not be odd to see a $208 - $210 forward number by the time 2022 dawns.  

So, while that sounds too far out on the time scale, remind yourself that we will be hearing about 2022 estimates in around six to seven months from now.

Some Updated Charts

As our readers know, housing is just getting started on a multi-year ramp in demand.  

As we relax for the Holiday Season and spend time with those we love, note the Durable Goods orders are at record highs, and the pipeline is full and waiting in line so to speak:

If you allow your eye to gaze back over the data marked in the blue line (above), nominal order flow is at new highs going all the way back to 1992.

Not a bad way to end a pandemic-laden year, huh?  

Add that data to the record corporate profits noted below and you get the feeling that things are vastly better than the MSM wants you to believe:

The data in the profits chart above can be somewhat confusing.  

It shows what’s coming direct from tax returns.  

Keep in mind that the "earnings season" reports are riddled with adjustments and such - GAAP and non-GAAP.  

However, the point is this: Reported profits to the IRS on which companies pay taxes, are likely legit.  

Record highs is the key focus.  

The world is changing…fast.

So, don’t buy the media drivel. 

That distraction is for the other guys.