When Actions Speak Louder Than the Federal Reserve

Mike Williams | 16th July 2019

The Haze

Beyond all the market action, the “Sell in May” crowd arrived with their wagon full of Dr Good to announce, “it has been proven more often than not that getting back in ‘lower’ may be a tough call ahead.”

Volume is now tepid and the 4th and 5th stringers are just about up to bat in the City and Wall Street.

Throw in the ridiculous and twisted headline contest between media outlets, and the stage is once again set for a little bit of excitement to wake everyone up.

Admittedly, the older I get (tis my 37th summer swoon radar watch) the tougher it gets to stay awake while watching this chatter.

Speaking of Hot

The economy isn’t.

That's good news by the way.

Slow and steady is what has fooled everyone thus far. But the decade ahead is going to wake all that up - not for bad - but for good.

We can expect plenty of disruption in the years ahead, and with this decade 95% complete the next one is on everyone's radar.

While the Q2 earnings season is about to get underway - except for black box triggers in low volumes - almost no one will be paying attention to anything but 2020 numbers.

So, let’s take a look at the latest from Thomson:

Forward 4-quarter estimate: $174.68 vs. $174.87 from last week
PE ratio: 17.25x
PEG ratio: 2.45x
S&P 500 earnings yield: +5.80% vs. +5.85% from last week, and
Year-over-year growth of forward estimate: +3.8% vs. last week's 3.95%.

"Yeah, But Mike, Growth is Slowing..."

Perceived growth going forward is always ratcheted down as earnings seasons begin.

It's part of the reason the long-term "beat" average is over 60%.

In essence, "analyst experts" spend the month before earnings season, "fine-tuning" their expectations (read: bringing down).

So, the number you see as a whole at the start of the season is lower than the one you see in the rear-view mirror when it’s done.

Think about it like this: The $174.68 number you see above (bullet point 1), likely continues to edge up to about $183-$185 by this time next year.

Now add another $7 - $10 in assumption if the "Trade War" ends anytime soon.

As adjustments get made and companies slowly glide upward (the key word is slowly), it will be easy to forget that at the end of 2017 (before the much-hated tax break), that number was $137.00.

And get this; as much as people hate the number now (30%+ higher), everyone was really happy in early 2018 as you can see from the sentiment reminder below:

Check the spike in bullish sentiment as 2018 dawned.

The markets have literally just moved above those prices seen back then.

In 18 months or so the trade range did exactly what all trade ranges do: Caused fear and trepidation, doubt, and a mind-blowing rush out of equities and into bonds…at 50 P/E's.

Perfect!

Now if we can just get the summer swoon out of the way then we can finish the warm-ups to this game getting ready to start.

Ok, I’m kidding - we don't have to see a summer swoon.

In fact, if we don't it likely suggests the classic race to the finish line in late Q3 and Q4 can be even more exciting.

Wasted Chatter

As much as the media wants you to fear it, the slowing pace jobs growth that has emerged this year is neither a precursor nor a harbinger of a coming recession.

Of course, in the "heads I win, tails you lose" montage of the press, this too will be seen as bad.

The odds are very high there is no recession coming; little can be pointed to that suggests one is - but that also hints, as we previously noted, that the Fed needn't feel any sense of urgency to cut rates.

The market has done it for them.

We warned of this for months - the concern over the pace of "jobs growth" is slowing not because the economy is slipping into a recession, but because many businesses are running out of people to be hired.

Collectively, they are having trouble finding new workers and some are uncertain about the future given Trump's ongoing tariff wars.

Slow-to-modest jobs growth, when combined with extensive evidence of low and relatively stable inflation (1.5-2.0%), and needling concerns that the tariff wars could weaken perceptions and investment in the global economy, add up to the likely justification for at least one small rate cut.

This could even take place at the July 31st FOMC meeting right when most are at the beach.

Worrying about jobs is wasted effort. We will need more people - or robots - sooner than most will expect:

Calafia Beach Pundit Scott Grannis does a great job of highlighting the jobs issue by charting often overlooked insights.

Here is one from his comments: "The chart above shows the number of part-time workers (blue line) and the ratio of part-time workers to total private sector employment. What stands out is the huge decline in the portion of the workforce that is working part-time. Full-time jobs have expanded at a much faster rate, and that points to a relatively healthy jobs market; businesses are confident enough in the future to seek out and hire full-time workers."

Remember, our underlying growth depends on overall confidence in the future and the positive results from those domino effects.

Actions tend to speak louder than words.

And Just One More Thing…

Wages continue to rise, and retail sales are at records.

You remember when retail was dead, right?

The data shot above shows that the orders process in the pipeline is also improving beyond expectations.

So, remember:

It’s summer, which means it's usually slow - expect it, don't fear it, and
Multiple data points suggest that inventory pipelines are simply being drained by the “trade war fears.” In essence, this sets the stage for a "growth dividend" once the "war" is settled and those inventories and investment return to normal levels.