Yet Another Earnings Recession Averted
It’s been two days…
Two days of selling - 48 long hours - 2,880 minutes – (and for those keeping track) 172,800+/- seconds since the markets went on tilt.
And, as some may have surmised, this time it’s about China.
Oddly enough, check your maps; this is the very same China we’ve seen in the frantic-to-near-breathless headlines for months now.
But this time (of course) it's bigger, badder and much uglier.
Gone are the days of falling earnings and the dreaded earnings recession that was predicted to begin in Q1 2019.
Yet Another Earnings Recession Averted
Holy macro-economic endgame Ironman!
(Are you kidding me?)
Do they mean the earnings recession that we were told would be caused by that pesky US / China trade war, and bring the entire global economy to its knees as the bleakest imaginable future rises up all around us? Is that what we’re talking about here?
Right under heading of a note from Dr Ed Yardeni that reads “Yet Another Earnings Recession Averted” it says:
"At the start of the Q1 earnings season, analysts had expected earnings growth to turn negative. But with nearly 83% of S&P 500 companies having reported revenues and earnings for the quarter, earnings continue to beat forecasts, and growth is trending net positive.
As they often have done in the past, industry analysts were too aggressive in cutting their numbers going into the latest earnings season. At the worst of it, analysts had S&P 500 earnings expectations down for Q1-2019 by as much as 2.5% y/y; that was during the 4/12 week. During the 5/2 week, the blended figure including reported results and estimates for yet-to-be-reported results was up 1.8%.
Once again, the earnings season is ending with an upward “earnings hook.
Since the earnings season started at the beginning of April, the S&P 500 index is up 3.5% through Monday’s close. Why hasn’t the market reacted even more positively? Obviously, investors didn’t really buy into the earnings recession scare in the first place, which explains why the S&P 500 rose to a record high of 2945.83 on 4/30.
On the other hand, they now have to worry about whether a US-China trade deal will happen. Although better than expected, Q1-2019 earnings results are still markedly weaker than Q4-2018’s gain of 14.3% y/y. That’s obviously a tough comparison due to the boost from last year’s tax cut.
Nevertheless, analysts’ expectations for the full year of 2019 do not seem to be fully incorporating the quarter’s better-than-expected results."
Now, if you want to presume that this same pack of wolves who have led you consistently down the wrong pathway for years - on any number of economic/market fronts - is now somehow correct over their latest doomsday musings, so be it.
But before you do, I provide Exhibit 1 for today:
It's already working (fear that is) as money leaves those ugly, very risky 15x to 16x earnings stocks, and floods into the 41x to 43x times earnings 10-year bond.
Note: This is the same spot where the experts have told you to be dreadfully afraid of higher interest rates and inflationary pressures as the demons of QE come home to roost.
Alas, no. Interests did not skyrocket after all.
By the way, that is why Mr. Gundlach, the current favourite child of financial media wants you to feel a bear is coming and the market is doomed.
He manages Bonds after all…and a lot of them.
Oddly enough, if one looks at the fees to be your saviour in this time of "need", with so many terrible things happening all around us, you will see that in many cases, bond funds charge roughly half of what you earn on the current drug of choice while in fear mode.
To wit, consider Exhibit 2:
For those who guessed that the chart (above) is for the trusted old S&P 500 ETF (SPY) for the last 20 years plus, you win the door prize.
And I’ve added the red arrow to help us glimpse through the cold grey drape of fear over your brain, and peer into the facts of the matter. While experts have been espousing the dangers of the world into any microphone that was turned on - for a decade now - the pesky old market has risen – more than just a bit.
Sure, it’s ugly at times. And it will most certainly be ugly later as well, probably many times over. But it goes up nonetheless for the long-term disciplined investor.
Learn to turn off your mind to all the bullsh*t.
The Other Point?
That dotted purple box is the ugliness of the last 48 hours, drawn all over the latest version of the China Syndrome.
Which, of course, brings up the value of Exhibit 3:
The lesson from Exhibit 3?
Well that one’s easy.
If the idea that a Communist country, run by gentlemen who made sure laws were changed so he could be "President" forever, and which has been proven repeatedly to be willing to steal anything you look away from for a second, has reneged on their words is somehow (in any cosmic universe) a "surprise", well, then you simply have not been listening very well for years.
In other words - a "surprise" it’s not.
As Yoda would say: “You must unlearn what you have learned.”
And What Can We Take from This?
The crowd is getting scared far faster than they have in the past.
The oft-covered "altitude sickness" is at work - the higher prices rise, the dizzier and more scared one feels as prices "fall" from higher heights.
It will only get worse.
And in the last 48 hours (at the time of writing), we have retraced over half of the levels of "confidence" which took all year to reach.
In just two days folks….
Finally, take a peek into how close we are already to arriving at the "extreme fear" band of readings (in orange).
This is all good news, because the market train will leave this station, like it always does, with far fewer people on board.
Folks, investing is not about finance. It’s about how people act with money.
Keeping it simple will be the most difficult thing you will ever accomplish with your long-term investment and wealth-building / management plans.