Market Volatility Breeds Doubt

Mike Williams | 12th April 2018

The Latest Good Stuff?

The earnings data remains robust.

According to FactSet, another interesting thing is unfolding.

As US companies learn more and more about their upcoming benefits from tax law changes, the pre-announcement season has been strong and setting records.

For the first financial quarter, 52 companies in the S&P 500 have (so far) issued negative EPS guidance and 53 companies in the S&P 500 have issued positive EPS guidance.

The number of companies issuing negative EPS guidance is well below the five-year average (80), while the number of companies issuing positive EPS guidance is well above the five-year average (28).

If 53 is the final number for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this metric in Q2 2006.

The current record for the number of S&P 500 companies issuing positive EPS guidance in a quarter is 47, which was set in Q2 2010.

At the sector level, Information Technology (38) and Consumer Discretionary (24) have the highest number of companies issuing EPS guidance for the first quarter.

This is not surprising, as these two sectors have historically had the highest number of companies providing quarterly EPS guidance on average.

What is surprising, however, is the unusually high number of companies issuing positive EPS guidance in the Information Technology sector.

The number of companies issuing positive EPS guidance in the Information Technology sector for Q1 2018 is 26, which is well above the five-year average (11) for the sector.

Make sure to recall what we have stated here repeatedly: Tech has been historically called a sector of the market. It allows us humans to keep track of things more easily I suppose.

But - and this is a really, really big “but” - as Generation Y continues to grow into the economic driving force they will shortly become, the "tech" we’re referencing will be everywhere.

It will become - or will be in the process of becoming - a part of everything.

Soon, it will be very difficult to keep an understanding of this if we continue to view "tech" as merely a sector of the market.

Now, here’s a graphic to show you just how robust the pre-announcement data has been.

Almost all of this has seen no media coverage with all the trade war chatter wastefully filling the airwaves and your mental bandwidth:

Earnings yield is a way to find out how stocks are being valued versus a "no risk" 10-year bond yield.

Today, the latter is down to about 2.76% with the latest war headlines.

On the other side of the ledger is the chronology of the S&P 500 "Earnings Yield" since the week of February 9th, 2018 – that’s when the stock market began some of its more significant increases in volatility:

4/6/18: 6.22%
3/30/18: 5.99%
3/23/18: 6.11%
3/16/18: 5.75%
3/9/18: 5.69%
3/2/18: 5.88%
2/23/18: 5.75%
2/16/18: 5.75%
2/9/18: 6.00%

(Source: Internal spread sheet tracking from TR / S&P 500 earnings data)

The S&P 500's "earnings yield" is higher as of Friday, April 6th than on February 9th, even though the S&P 500 (denominator) is higher since the forward four-quarter estimate has risen all quarter.

Fascinating huh? For long-term investors this hints at even more value building.

Note this: The last time the S&P 500 earnings yield was above 6% was October / November 2016, just prior to the all-too-feared 2016 presidential election results:

11/11/16: 5.93%
11/4/16: 6.05%
10/28/16: 6.07%
10/21/16: 6.03%
10/14/16: 6.06%
10/7/16: 6.01%
9/30/16: 5.77%

Today, we are served up a near-constant stream of garbage on how experts feel "the stock market (i.e. S&P 500) is expensive."

Any normal person will find it can become somewhat challenging to remain a longer-term optimist on stock prices.

Some Helpful Data

The high for the S&P 500 on January 26th 2018 was 2,872.87. The close for the S&P 500 on Friday, April 6th, was 2,656.88 for a loss of 9.3%.

This is still a pretty normal correction and something not seen since Q1 of 2016, when the S&P 500 corrected roughly 15% from the July 2015 high to the February 2016 low.

Looking at the "average" S&P 500 earnings yield in the first two months of 2016, when crude oil was falling to $28 and credit spreads had blown out, the "average 8-week yield" was 6.54%, not much more than today.

And while it would be easy to overlook, let's recall that Trump's tariff war of words with China is a process. It is subject to a 6-month "public consultation" period.

Nothing is policy yet.

This is posturing and negotiating by headline right now, and most will be quite surprised at how well it works out.

One More Week

And just around the corner is impending headline racket for Q1 earnings.

Here is the latest batch of summaries from Thomson Reuters as of Friday's close:

Forward 4-quarter estimate: $161.92 vs. last week's $158.14
P.E. ratio: 16(x)
PEG ratio: 0.81x
S&P 500 earnings yield: 6.22%
Year-over-year growth of forward estimate: 19.82% vs. last week's 20.74%

By the time we get to the end of Q4, it is highly likely we will be seeing a forward number closing in on $175.00 – extend that out to, say, August of this year.

And as we’re saying good-bye to the summer doldrums you get a P/E on 2019 data of just 15.04 at today's market level.

Wow!

Pray for more war chatter. The scarier the better. Because volatility breeds doubt; the second weakest part of the human psyche.

For long-term investors that means hunting season is open.