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Investing Strategy: The Sun Will Come Out Tomorrow

woman pulls pack page and reveals sunset.
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Thursday, 28 February 2019 08:30 AM Current | Bio | Archive

There are lots of explanations for why stock prices plunged late last year. The most plausible is that investors feared an imminent recession caused by tightening monetary conditions and a possible US trade war with China. Exacerbating the selloff were the activity of algorithm-driven computer trading systems and a bunch of hedge funds that had to liquidate holdings before shutting down after a year of bad performance. The relief rally since the Christmas Eve massacre has been driven by the Fed’s pivot to a more “patient” approach to monetary policy and mounting signs that there will be a China-US trade deal.

Frustrating the bears is that the rally comes as the batch of economic indicators for December and January confirms their recession alarms. The latest one came out for housing starts yesterday. As Debbie discusses below, starts fell 11.2% m/m during December, with declines of 6.7% and 20.4% in single-family and multi-family units (Fig. 1). On the other hand, housing building permits rose 0.3%. Debbie and I blame bad weather for the weakness in starts and see a spring rebound, as evidenced by the uptick in permits.

In any event, as Joe and I observed in our Valentine’s Day missive: “So why are stock prices continuing to rebound from last year’s Christmas Eve low now that everyone is curbing their enthusiasm for earnings—with some alarmists predicting that that low will be tested once companies confirm how bad earnings are this year? Good question. Why are we still aiming for 3100 on the S&P 500 by year-end? We’ve previously acknowledged that was our forecast for year-end 2018. We feel like investors were robbed of a good year. Earnings rose about 24% last year, but the S&P 500 index fell 6.2%. So there should be some catch-up this year even if earnings are flat now that fears of an economic recession have dissipated.”

Meanwhile, industry analysts continue to lower their expectations for S&P 500 revenues and earnings growth rates this year while raising them for next year:

(1) Revenues growth for this year has been lowered to 4.8% during the 2/14 week from 5.6% at the start of this year. Next year’s consensus estimate has increased from 4.9% to 5.5% (Fig. 2).

(2) Earnings growth expected in 2019 has been slashed from 7.6% at the start of this year to 4.4% as of the 2/14 week, while growth estimated for next year has increased from 10.8% to 11.3% (Fig. 3). As of the 2/21 week, consensus estimates for S&P 500 earnings are $168.37 this year and $188.30 next year (Fig. 4).

(3) Quarterly earnings consensus estimates for this year continue to be cut by analysts as they respond to company guidance during the latest earnings reporting season for Q4-2018 (Fig. 5 and Fig. 6). The bears can declare that the earnings recession has started because the 2/21 week showed a decline of 0.8% y/y for the Q1-2019 estimate. The Q2 and Q3 estimates are down to only 1.5% and 2.9%, respectively. They could turn negative in coming weeks. But the stock market must be looking beyond these dismal numbers, as analysts are predicting that earnings will be growing again during Q4, with a current estimated growth rate of 9.8%.

We agree with the analysts: The sun will come out tomorrow, and the stock market will continue to shine. Consumers seem to be in the same sunny camp now too. As Debbie reports below, the Consumer Confidence Index jumped 9.7 points during February, reversing nearly two thirds of its decline during the previous two months (Fig. 7).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
 

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EdwardYardeni
We agree with the analysts: The sun will come out tomorrow, and the stock market will continue to shine. Consumers seem to be in the same sunny camp now too.
investing, strategy, sun, tomorrow
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2019-30-28
Thursday, 28 February 2019 08:30 AM
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