Market Bubbles & Amnesia
Is there an odd cloud rolling over the landscape or am I just seeing things…?
Just in Time for Halloween
Everyone is already scared.
I added the hand-drawn red line in the second chart to help you see more clearly what is a rather unprecedented situation.
Approximately 98% of all weekly bullish sentiment readings since the March 2009 lows are now higher than our current readings.
It’s astonishing.
Furthermore, the eight-week moving average of this data is down to 28.92%.
Now, that moving average takes a long time to change. Its peak since the March lows occurred on December 11, 2014, was 49.83%.
The S&P 500 at the time was 5.5% lower than where it stands now, but it’s taken nearly two years to travel that path with more than its fair share of chop and angst along the way.
It reminds me so much of 1982 that it’s spooky.
No More Bulls
Last week's bullish sentiment reading from AAII marks the lowest reading since the week before the Brexit vote.
Bullish sentiment has now been below 40% for 48 straight weeks, including 82 out of the last 83.
Now, these are circumstances you would normally expect after a bear market has occurred.
But reality and sentiment are painting two completely different pictures. As bizarre as it all seems, history makes clear that this scenario is very good news for long-term investors.
The Earnings Turn is Upon Us
While the press will inundate us with a "6th quarter of earnings recession" news over the next 15 days, they will as always leave out a few important facts.
Analysts regularly spend the final weeks of a quarter bringing earnings down. As a result, shares weaken, earnings then beat, and shares rise. It’s usually a choppy ride with hiccups along the way.
This time should be no different. But as long-term investors we must endure that near-term noise to gain the long-term profit.
Here is your latest data snapshot:
First, Thomson Reuters and FactSet are expecting the following for Q3 '16 S&P 500 earnings growth as of September 30 '16:
- Thomson: -0.5%
- FactSet: -2.1%
Per FactSet, this could be the 6th straight quarter of negative earnings growth for the S&P 500.
Don't count on it.
As noted, analysts' consensus S&P 500 earnings growth overshoots to the downside on a regular basis.
And as reporting begins, the actual earnings growth for the quarter starts to get revised higher. Dr Ed Yardeni and I cover this often each quarter.
Here is a recent history (courtesy of FactSet's Earnings Insight) of the S&P 500's "upside surprise":
- Q2 '16: +4.4%
- Q1 '16: +4.1%
- Q4 '15: +1.2%
- Q3 '15: +5.3%
- Q2 '15: +4.1%
- Q1 '15: +6.5%
Using the above numbers, the average "upside surprise" for the last 6 quarters was +4.3%.
Add this average upside back into the negative expectations (noted above) and you’ll find we’re seeing the turn to positive year-on-year growth.
Oddly enough, the fact that earnings revisions this quarter have been more positive than negative, could find the actual results we'll see in 6-8 weeks may provide for a slightly larger surprise.
And the cloud that energy has provided to mask "these terrible earnings" is also lifting, just as prices try to stabilize.
Remember for our earlier notes that I pointed out most of the shale activity here in the United States has now become profitable at between $38 and $47 a barrel, depending on the region being drilled.
Thank technology expansion and young Generation Y engineers.
The data set from Thomson Reuters and FactSet for expected Q3 '16 Energy sector earnings and revenue growth is noted:
- Thomson: -65.9% decline in earnings growth
- Thomson: no estimate for revenue growth published yet
- FactSet: -67% decline in earnings growth
- FactSet: -12.5% decline in revenue growth
So why is this good? Well, the -12.5% revenue decline noted by FactSet would be the smallest rate of year-on-year declines for the sector since it peaked in Q3, 2014.
The hilarious part of it all is that if we happen to see oil stabilize in the $50-$60 range, we may find ourselves "shocked" by the pace of earnings recovery in 2017-2018.
Be careful though: when that good news happens, we will all be told how bad it is. And it’ll be suggested that we’ll shortly endure the" inflationary shock ahead," along with rapidly rising rates.
The Black Swan Hunters will never be lacking for bad news to spook you with.
One Last Note
If you are terrified about rising rates then don't be. Rates will rise when one thing happens:
Fear recedes = rates rise
The AAII charts show that fear and remains deeply seeded across a wide audience.
And the next time you feel that it may be gone, wait for the next 3 to 4 day minor setback of 500-800 points. Then you’ll see it clearly; front and centre.
I stand by the argument that it will take many years of significant price increases to get people even remotely giddy about stocks again.
Bubbles....
If you are also afraid of a bubble, then don't be.
Our economy is morphing into a wave of strength many will find hard to understand.
The generational shift from the Baby Boomers through to Generation Y will be with us for decades.
And yes, ups and downs will accompany this.
But even if you’re fearful of bubbles, don’t mistake that for being contrary.
How bad is it? Morgan Housel tells us that according to various media sources we now have at least 14 bubbles:
- A new real estate bubble.
- A bond bubble.
- A tech bubble.
- A VC bubble.
- A startup bubble.
- A stock bubble.
- A shale oil bubble.
- A healthcare bubble.
- A dollar bubble.
- A college tuition bubble.
- A Canadian housing bubble.
- A central bank bubble.
- A social media bubble.
- A China bubble.
Let's keep this simple: Yes, there is risk in everything you will ever invest in. But that having been noted, we have reached the point where anything that rises beyond the price the doomsday sellers think it should be is considered a bubble.
But did you know that the word "bubble" wasn't anywhere in our global economic lexicon even 25 years ago! Not in textbooks, not in papers, not in schools. But now we seem to have bubbles everywhere.
Excuse me while I choke on my coffee laughing.
Decades of demand are already built into our nation's demographic fabric.
The economy we are seeing unfold is set to change everything that we think we know about today.