Market Monsters? The Media Can’t Exist Without Them…

"All that we are is the result of what we have thought."
- Buddha

Do not be surprised if you find yourself feeling a little fuzzy as we head deeper into the holiday haze.  

Think of it like an annual right-of-passage.

As for the financial data, well, overall, it remains on a solid upward trajectory, in fact so much so that you’d be forgiven for getting that itch in your gut suggesting it’s almost time for another bigger, scarier monster to arrive.  

And while Covid-related hospital percentages fall, and the vaccines take centre stage the media needs a new "fix" to terrify us with as 2021 peers out into the darkness. 

In a Perfect World?

I would suspect we’ll get a bit of a market lift heading into year-end.  

That said, tax selling does not yet seem to be creating any real pressure. Still, I’m getting the sense that we’re like those astronauts a couple weeks back sitting on top of the Falcon 9 rocket at T-Minus 10:00 and counting.

Historically speaking, when January arrives after a strong previous year finishes it often results in early year profit-taking from those traders who work from week to week.  

The good news about this – if it happens again - would be that we then set the stage for the spring-coiling effect again. 

Long-time readers have seen a lot of these things now. A good year-end with somewhat positive days at the start of the New Year, and then it hits: the new monster.

The media can’t exist without one.

And social media would, well, implode without some series of memes about some terrible outcome going viral.  

Ain’t life grand!

Anyway, seeing some red ink in January also brings out all those old videos of how the year goes bad if January is down, etc.  

Those events dovetail right into the idea of burning off some of this elevated short-term trader sentiment.  Money flows still do not portend any significant overheating - since we still have over US $18 Trillion in the bank and a Federal Reserve who has made it certain that no interest rate hikes will happen until things are going well for quite a long time.

Net-net: Do not be surprised if we see some setbacks in January after a strong recovery year like this.  

Just under the surface it will only take a headline or two about some new monster to send weak-handed investors rushing to the exits…again.

That’s a good thing for long-term investors. It recharges the spring-loaded forces already supporting us for years into the future.

Earnings Updates?

We’re just about done for the Q3 data and we’re already behind the eight-ball for Q4 data.

Strangely, the next earnings season is a mere six weeks away.

Here’s the latest from Refintiv on that:

“There was no change this week to the positive S&P 500 EPS trends over the last 5-6 months.

With the mainstream media and others screaming for additional fiscal stimulus, the S&P 500 numbers are telling a different story. The trends in S&P 500 earnings are saying ‘higher EPS is more probable than not’.”

A Quick Summary of the Details

• The forward four-quarter EPS value this week was $160.40, versus the $160.08 last week. (recall, this will roll upward by $8-10 when we roll into Q1 and look forward for the full 2021 data). 
• The PE ratio is 23x, which is a little high for an expected 4% average growth rate in S&P 500 earnings for both calendar 2020 and 2021 (hinting that the numbers are low). 
• The S&P 500 earnings yield is 4.34%, a six-week low from the high on 10/31 of 4.84%.  This is still substantially higher than the 93 basis points for a 10-year bond. 

Now check out these very productive and forward-positive items:

• The Q3 '20 "bottom-up" S&P 500 quarterly estimate was just $32.91 on September 30th and has already moved up to $39.42 as of Friday, December 4th, 2020.  That’s a very substantial move indeed, particularly as- analysts were short on expectations for over 90% of company reports! 
• The calendar 2020 S&P 500 estimate was just $125 on the mid-year read from June 30, 2020.  Now it’s over $138.00 today and climbing.

And now for something you won't hear in the MSM. Note that what's interesting about the 2020 calendar year S&P 500 EPS estimate shift is that almost precisely when the "extra" stimulus benefit ended in late July 2020, the 2020 S&P 500 EPS estimate began to increase rapidly.

It’s likely we will keep hearing mainstream media drive Armageddon stories screaming for additional fiscal stimulus.

The good news is that the S&P 500 numbers are telling a very different story.

S&P 500 Forward Earnings Curve

To show you how afraid analysts are to raise expectations - even as companies are beating and raising at ridiculously high rates - the 2021 S&P 500 estimates have been almost constant since mid-August '20 at $165-$166 per share.

The bottom line here is that the sell-side analysts are afraid, which has always been a good thing for upside surprises. As we’ve repeatedly shown, they missed very badly on Q2 and Q3 2020 EPS and revenue estimates, and yet they still refuse to lift Q4 2020 estimates at all.

I’ll say it again: Pray for some January fear-selling, because corrections are likely to be fewer and farther between as we move further into 2021 and beyond.