Markets in general have entered that “ho-hum” window we had suggested was quite likely as earnings season dawned. Earnings have been mildly better than expected so far – and in fact, forward earnings have taken a turn upward after 4+ quarters of a slight down-shift.

The chop we have seen over the last week or two of trade sessions is a healthy pause – though I still stand on the side of the field where I am hoping for a shift to more of a pullback.

I would reiterate: if we get through a lackluster earnings season without a more significant pause, the markets may be telling us they have already overcome near-term headwinds and are moving on to the higher valuations matching the Demogronomics pathway ahead already covered.

It is worth repeating: think demographics – not economics. Meaning we want corrections to take advantage of as short-term thinking will remain ineffective – and for the most part, unprofitable.

Sell in May

You can already hear it right? That faint, grinding noise itching at the back of your mind saying:

“Well, Bob, we did recover from the start of the year’s panic selling. We have gone from ridiculously oversold to now somewhat overbought. We are back to ‘resistance’ which has held us back for 18 months now….and here is May on top of us – and then you got the dreaded ‘summer swoon’ to boot after that….”

It is an easy bug to catch – simple bait to go after – and much of the crowd does.

But know this ahead of time, I have yet to meet the client who was able to “sell in May” at highs and then find the low where they were supposed to go back in before October rolled around.

In a line: Way too short-term thinking ahead – and a whole host of head pain not required given the Barbell Economy we are running on…for the next few decades anyway.

Instead we are far better off continuing to use whatever corrective waves we might encounter as fields of opportunity to shop and build within. Yes, they can be ugly near-term – just recall the first 6 weeks of the year for an example. However, values are real and accrue over time to those who can remain patient and diligent – focusing instead toward the long-term horizon ahead.

Forward Earnings Perking Up?

Dr. Ed reminds us that S&P 500 forward earnings have tended to be a leading indicator of actual operating earnings–except, when earnings recessions are ahead which can cause significant shifts in short-term outcomes. We stand by the idea however, that markets in general tend to discount forward earnings and surely more so when fears remain high under the surface.

On the positive front, S&P 500 forward earnings are now up for a sixth week through mid-April. This gives us an 11-week high from a 10-month low back in early March.

More important than weekly highs?

Forward earnings are now just 3.8% below their record high back in October of 2014 – which corresponds almost directly with the earliest signs of damage in the energy sector AND the highs in the markets – leaving the broader averages to run in place for the last 18 months as previously referenced.

Be Prepared

Recall the confluence of events at this high point (Oct 2014) was the burgeoning fear about the collapse of energy and the strengthening dollar as two major headwinds.

Another quarter or two and we will have completely round-tripped the largest impact of these two fears. The surprise will be that sooner – rather than later – forward earnings will begin to accelerate again from a higher base – after what will become a very mild pause when seen in the rearview mirror of time.

Hence – like a broken record – pray for corrections. And if we can get thrown a summer swoon – all the better.

Risk of Being Lost in the Noise

We all know by now that the investment world is filled to the brim with research reports and data splicing. Intelligent and educated people generally like to think they will benefit from careful study and accrued knowledge. While it seems unfair, the investment world is different.

A little knowledge can be very dangerous. Add this all to the simple fact that emotions play such a huge role in the way we interpret data and you fall back to the odd idea:

We must have a larger backdrop to fulfill and understand the targeted benefits of a long-term view and investment plan.

Mind Games

There are many examples of how our minds and emotions will continue to provide many speed-bumps ahead.

While today’s morning note in no way intends to cover all, a few thoughts are helpful in pushing you to step farther and farther back to get better results. That said, let’s start with a few things I picked up in other articles which mirror what has been covered here before:

Shifting Indicators

This happens when the “rules” for interpreting data are changed to fit the preconceived conclusion. The trick is that it can either come from the speaker – or – the listener. How many times have you bought, say, your car in red (because no one has it in red) and then driving off the lot and to your home – you see 7 duplicates of your car in a 10 mile stretch?

Or how about these recent examples of damned if you do – damned if you don’t:

Expensive oil was terrible for us and will drive hyperinflation
Cheap oil is bad for us and will cause deflation
QE and printing money will cause hyperinflation
The loss of QE is bad for us too
The weak dollar will forever knock us from world power
The strong dollar will hurt us apparently even more
Recently the bears have often spoken of the divergence of small-cap stocks
When the Russell 2K is leading – the market is “frothy”
When small caps lag, it is a divergence and a warning to impending doom

Head Spinning Yet?

I hope by now a chuckle has come to mind. But it goes on – and the lesson is the same. The only solution for this mess is to know the agenda of the source – and to step way back from the noise.

While agendas are rarely provided we do know this from way back in the early 80’s when I started: everyone talks their book.

The Really Big Picture

Short-termism simply does not work. It spins you in circles and defies all investment plans.

Count people – not money.
Think demographics – not economics.

We are in far better shape than we can possibly imagine. Everything we thought we knew about yesterday will change tomorrow as Gen Y kicks in with more power than we are currently expecting en masse.

Generation Y is just taking the reins.

Generation Z are just youngsters still but are birthing at the same general rate as Gen Y –

Meaning two huge generations of DEMAND and CREATION are building in the pipeline and headed our way.

The rest of the world should be so lucky.

Be ready to use corrections to your advantage during the earnings noise and summer swoom (if we are fortunate)