Long Live the Consensus
Impeachment, Cyber Monday, extended Black Friday, records set in the shopping malls and online, cars lost in packed parking lots, innumerable false reports about how poor we’re all doing…
Ah, the holiday haze is in full swing!
Markets are feeling a bit choppy as the positive year may very well lead to a somewhat tepid run to the finish line.
And don't get too stressed about a lack of "catalysts" as pretty much everything - and the kitchen sink - has been thrown at this market for 2019.
The chop is a good thing - especially after breaking out of a 21-month trade range. The longer we can keep the underlying trepidation and doubt about direction going, the "slower and steadier" the subsequent rise is likely to be.
And On That Front...
“They” would have you believe there are still no bulls to be found.
Even as we inch into new stock market and cash pile highs, shadows still lurk in the minds of many investors:
Right up until the end of last week over 65% of the investor audience is still pretty down on the market and its direction.
Between the 21-month consolidation, chop and trade range angst – alongside the 2008-2009 shellacking that’s still somehow arrives fresh into everyone's minds whenever we see a one-week setback - consistently bullish emotions will be kept at bay for far longer than almost anyone assumes.
We’ve been saying that since the Dow Jones was at 7500.
You Gotta Give 'em Credit...
While most were focused on the upcoming Thanksgiving meals, family-time, football, and parades, I was struck at how many economic reports came in far stronger than anticipated.
Note how many were solidly "above consensus" - still another sign that we are doing pretty well, in spite of all the bad karma in the media world:
The above was, as you might expect, quickly followed by the following bizarre headline.
I can only presume they were missing entirely the idea that we are indeed running out of homes to sell - thanks to the just beginning binge of interest from Generation Y.
And by the way, we are down to less than 3.5 months of supply!
Then, we saw the more robust reports on PMI's, LEI's and even GDP surprised to the upside.
Now listen, if the all-too-watched GDP is missed this badly - you know the negative pall has become somewhat blinding.
Even as the constant droning on of bad news is set to continue, the world is ok out there.
The US has never been stronger in most, if not all, economic stats of importance.
And now for some pleasant reality checks:
Hidden in all the mess and consternation about "growth", the comps have indeed been tough, clouding the steady improvements in most areas.
To break it down just a little behind the scenes consider this set of thoughts:
- The data show us that updating the numbers this holiday weekend, the expected 2019 S&P 500 estimate today is $162.20 vs. 2019's actual tax-cut-aided $161.93, so there is now a whopping difference of $0.27 between the two years' actual S&P 500 EPS, which puts 2019's expected S&P 500 EPS growth rate below 1% as of this weekend.
- Assuming FactSet's 14% "organic growth rate for 2018 is accurate (and FactSet is a quality firm, so there is no reason to expect the earnings team just threw this number out there), 2018's "true" EPS should have been around $150.48, which is arrived at by multiplying 2017's actual S&P 500 EPS of $132 by 14% (1.14), which leaves us with $150.48.
- If taken from this perspective, 2018's steady improvement over 2017 (tax benefits scrubbed out), is followed by another steady improvement in 2019. So far, 2019's expected EPS of around $162.20 (note that we don't have fourth quarter '19 numbers yet) shows an 8% or so YOY growth rate - again, adjusting for the impact of 2018's Tax Cuts & Jobs Act.
Many may likely protest this analysis, but the math is simple and self-explanatory, and it allows one to see the underlying tilt upward even as bad press drowns most of it out.
S&P 500 Data (by the numbers)
- Forward 4-quarter EPS: $171.89 vs. last week's $172.56
- Forward PE: 18x
- Forward PEG: 35x (this will be explained shortly)
- S&P 500 earnings yield: 5.47% vs. last week's 5.55%
To summarize: This is a way to help clarify "organic earnings growth" for the S&P 500 for 2018 and 2019, after adjusting for the tax-bill's impact.
So many in the media just look at and report the calendar year growth rates and give their commentary, picking out data to support their bullish/bearish view.
But tax reform was really a meaningful event from an S&P 500 earnings perspective.
However, even without tax reform we saw S&P 500 earnings grow 14% in 2018 (again per FactSet), while adjusting for that, this year's growth was pretty average at 8%.
It’s not great, but it’s also not as terrible as you'd think either when reading all the news.