Dancing the Stock Market Salsa
As we (in America) shove the ‘joys’ of ‘Tax Day’ towards the rear-view mirror I think it might be helpful to review a few things for the sake of perspective (and our collective sanity).
Just ahead is a period of the year we normally reserve for boredom, a search for reasons for things that border on the ineffable, low volumes, choppier price action and the annual investment salsa routine of the market taking a few steps forward, and then a few steps back.
And thereafter the dreaded summer vacation window of price setbacks or peaks arrives - with the ever-present risk of a summer panic.
It’s a state of mind more often than not driven by the reality that no one is around, and that the City and Wall Street benchwarmers are on deck at the trading desks - volume creates air pockets in the normal process, permitting the algorithm and black-box traders a chance to push things around a little bit more than normal in the short-term.
Take note: As has been the case for every summer swoon to date, consider them like long-term opportunities to build on your plan.
For those focused on compounding dividend income, we often see an opportunity to add some higher yields, while most in the crowd are either at the beach, ignoring all market elements or over-reacting to each and every market hiccup.
Late last week we saw the start to the Q1 earnings season.
Note the fact that we have seen a significant reduction in expectations in most sectors.
The year kicked off with worries over recession and slow growth, following an alleged annus horribilis of losses in markets and significant gains in earnings.
Roughly 15 weeks into 2019 and we see a year's worth of average gains already on the board, and yet the droning on in the press continues about how bad things are for the world.
The real tidbit to take away from it all is that there will never be a time in the future where the financial media will tell you that the world looks ok.
Because it’s bad for business.
So, in pursuit of perspective here are the latest stats (at the time of writing):
- S&P 500 Weekly Earnings Data: (Source: I/B/E/S by Refinitiv)
- Forward 4-quarter estimate: $172.34 vs. last week's $173
- PE ratio: 16.8x
- PEG ratio: 2.63x
- S&P 500 earnings yield: 5.93% vs. last week's 5.98%
- Year-over-year growth of forward estimate: +6.4% vs. last week's +6.7%
The bottom line here is that we’re back to the normal processes following the "tax bump" year of 2018.
Keep in mind that we covered the effect of the tax bump often in 2018, where analysts would talk down earnings going into the season and the beat ratio would prop it back up as the season wore-on.
The credit markets remain healthy and the US Fed interest rates game is on hold.
Given the deep-seeded fears about equity values - a constant burn from 2008-2009 pain - look for demand to remain high for debt, and hence keep rates low.
The change is structural - even as fear pervades the markets – and easily ignited on a moment’s notice.
It’s easy to get lost in the month-to-month "jobs reports" or the weekly jobless claims. But doing so can risk missing the larger event unfolding.
Scott Grannis at the Calafia Beach Pundit does a great job with the chart on these issues:
In driving helping to drive better insights about the health of the US labour market (recall consumers drive 70% of the economy), it is wonderful to see this data so often overlooked.
The first chart above shows that first-time claims for unemployment are at record lows.
Relative to the size of the labour market, claims are an order of magnitude lower than they have ever been before.
This is near nirvana for the average worker since it means the likelihood of losing one's job today is as low as it has ever been (see the second chart above).
No wonder consumer confidence remains high.
The audience tends to get so lost in the details they miss out (on perspective) on just how large the US workforce has become.
And while these elements are vastly overlooked by the negative "tilt" in the media, you can be absolutely assured that when the data does point ever-so-slightly back upward on those charts (small purple box highlights), the press will be all over it as a sign of trouble brewing.
As noted above, fear remains a guiding compass for the average investor.
Why else would the audience take on all debt that’s being offered?
Well, in reality, credit risk also helps us judge the economy’s relative strength.
The chart below - also from Scott Grannis - shows the spreads for 5-year generic Credit Default Swaps.
This is a timely and liquid indicator of the market's outlook for corporate profits, with lower spreads reflecting increasing confidence.
The bottom line is that credit spreads today are quite low. And while the market "experts" may profess to be worried about a weaker economy, the appetite for credit risk remains strong and stable:
One more though about our alleged slow growth.
The benefit of slow growth is that it tends not to "overheat."
Taken another way, if we had "fast growth" instead, the same pundits telling you now that this is the "slowest recovery on record" would be warning you that the fast growth would force rate tightening and looming recession.
There’s just no winning, eh? Thus the reason not to expect any “The world is just fine” headlines from the financial media in the near future.
And just like high gas costs were bad in 2008 and low gas costs were bad in 2016, long-term investors learn to embrace and welcome the idea that "nothing seems to be good for us..."
We will begin to fret when the entire world gets on the other side of the bathtub and begins the believe the real "no-lose" future is in stocks, baby.
MY hunch is that we’re likely tens of thousands of Dow Jones points away from that future neighbourhood.