When the Fear Breaks…

The latest earnings season is now upon us. 

I swear it feels like the last one just ended about 74 minutes ago. 

My wife keeps telling my it's a sign of Alzheimer’s.  I tell her she's nuts.  She ignores me.  You get the picture …

Now, what was I talking about?

Oh yeah, earnings.

One for the Record Books

So, you’re probably fed up hearing me say that this earnings season will be one for the record books. 

And based on the first few to trickle in let me tell you that there are still a ton of people out there who just don’t get it - they don't get how good this economy is going to become.

Now, that’s not to say that my other regular request (read: prayer) is that we get a correction.

For long-term investors today we might consider a correction sometime in 2018 as a complete gift. 

Grab it when it comes, give it a big hug and buy that dip.

Running away from it, or trying to find a way around it or time it will be a) a waste of time, and b) very, very expensive in the long run.

If that sounds nutty then you’d better read on…

Because when we are done with the Q4 earnings season, I strongly suspect we will be within a quarter or two of $150 forward earnings on the S&P 500.

That puts us somewhere around a forward P/E of 18 in world of bond prices at or near 40 times earnings. 

When the earnings yield on the S&P is more than double that of the 10-year treasury, you can historically remind yourself of two things:

1) A ton of investors still hate stocks, and

2) Only higher prices will make those investors like stocks more.

A Slow Burn

"Rates today are not low because the US Federal Reserve is controlling them. The Fed controls nothing. The Fed follows, and these days, talks a lot. Interest rates are low globally because investors in general are terrified of perceived risk. They have been taught that bonds are 'safe' and that stocks 'hurt'."

“That pain has caused lines to form around the block for buyers of anything in the bond market. And that is why rates are low."

“And rates will begin to rise when that fear fever breaks. As fear burns away, so too will low rates."

Now, while this slow burn has been going on for roughly 18 months, headlines in the last few days noted the 10-year spiked above 2.50% (just a mere 40 times earnings).

But the rest of the world stayed pretty steady. 

Calls for Bond Armageddon 7.0 (the other 6 were wrong) will prove to be wasted energy too:

Repeat after me: “The 10-year is still less than half of the S&P earnings yield.”

Woe is Me: Inflation

Yep, that’s the other lurking monster. Or so we’re told.

Inflation is now up to a whopping 2.0% with last month’s revision – that’s moving through a 0.1% change month on month.

But here’s the longer term picture - focusing on the blue line from the chart below. Keep your eyes on the range of 1% and 3%. 

Going back to the year 2000, roughly 92% of the readings have been within that range.

Today, we find ourselves at record highs in almost everything business related, from truck tonnage to GDP to manufacturing to earnings - and we are smack in the middle of the core PPI inflation range of the last 17 years. 

Not too shabby, eh?

Ehh, On Second Thought...

There’s been lots of chatter over the last week about the breakout in AAII bullish sentiment. 

I don’t like it that the readings were high, but I’m reminded that the 1980s and 1990s were filled with years of high readings. The key here is the $11 trillion dollars in cash in US bank sitting idle, meaning those "bullish feelings" are just skin deep.

By example, in just a week it seems those temporary bulls had second thoughts of being way out on that limb and feeling good again. Bullishness dropped by almost 10 points (20% of the whole). That’s a huge and rapid move:

One more time folks:  pray for a choppy, sometimes ugly earnings season. 

We get one of those and I'm taking bets on bulls in the 20s again. 

It's all good.

The fear is real. And it certainly isn’t anywhere near breaking yet.