Needless to say, we are in the middle of the two busiest weeks in the current earnings season. Is it just me or does it seem earnings season never really ends anymore?
The data remain compromised – as expected – from the energy sector adjustment and trickle-down effect. As we have previously covered, this situation likely has another quarter to go before we can get out from under the “earnings recession fog” and see growth again. Given the latest Fed meeting chatter is likely just that – chatter – one can expect that rate increases are unlikely to occur prior to the election. God forbid if the Fed ever got “political” in the PC world we live in today.
I am sorry but I cannot get over the fact that we have seen all-time new highs in markets – and very little pullback since – all to no celebration. No good articles. No push of capital into mutual funds (indeed, just the opposite). No seismic shifts in investor sentiment polls. Nothing. Incredible. And also a big positive for long-term investors.
Trust is the key. Recent surveys by Kroll showed some very interesting results. Imagine this for a moment: 1000 adult investors were polled and asked, “What they would do with their investment capital if they did not need it for 10 years?”. The answers:
- 25% – buy real estate
- 23% – keep it in cash or bonds
- 16% – gold
- 16% – other precious metals
- 16% – stocks
- 4% – undecided
Now some interesting thoughts can obviously be gleaned from here. My shot at the interesting ones:
- Just 7 years ago, real estate was the linch-pin for the near collapse of the entire global economy
- 84% chose something besides stocks – while the market is at record highs – for 10 years?
This clear fear of and lack of trust in the markets comes from many years of a roller-coaster effect, driven by one problem after another. While each of the moves down were followed by a move back up – the fear is now deeply seeded. As one can see from the shift in perspective on real estate – the thing that often changes that perspective is rising prices.
In other words, the age-old issue is still at work: I will sell what I am fearful of – and I will buy it back when I am no longer afraid. The kicker: Fear never recedes until prices rise.
Case in Point
I wanted to highlight a comment from the most recent real estate data on home sales.
Before you read – recall the headlines of just 7 years ago. Real estate was toxic. It was at the bottom of the bin and we were going to have too much of it for decades to come.
NAR’s chief economist noted in the latest sales release, “With only the Northeast region having an adequate supply of homes for sale, the reoccurring dilemma of strained supply causing a run-up in home prices continues to play out in several markets, leading to the last two months reflecting a slight, early summer cool-down after a very active spring.” (my note added – it could also be that people are on summer vacation – look for a boost when they return)
He went on to warn that “until inventory conditions markedly improve, lots of prospective buyers are likely to be priced out of the market or outbid on the very few properties available for sale.”
Lots more homes need to be built – Gen Y really has not even begun to scratch the surface. Recall, they were late to the game on the home-buying section of life. The wave is out there…and it is going to come ashore.
The lesson: as markets continue to rise, the avalanche of outflows from equities and inflows into bonds will shift. The stage is set for the normal process of human nature to unfold. Investor sentiment will rise only as markets rise to much higher highs. There will be a number which causes the dam to break. That number will not be lower – it will be higher.
If one is not careful, you can get sucked into the garbage being spewed by the candidates – providing the choice of which one is less bad in November. My job here is to help keep us all focused on the more important things unfolding behind the scenes and underneath all the mess.
The big fear rising of course is one of the monsters I am confident we will all focus on later: Will the new President bring recession. Let’s review some data. as some of it does raise a few eyebrows:
Recessions first: Quarterly GDP data was first compiled way back in 1947. Since then, Dr. Ed reminds us that there have been 17 presidential elections. In a somewhat spooky parallel, there have also been 11 recessions.
Almost all of them either coincided with elections or occurred shortly thereafter. There have been only five examples where no recession unfolded between elections.
So, while overall data continue to slowly etch out improvement in the Barbell Economy focus, one can argue that the political cycle does drive the probability of a recession next year.
Anyone watching the conventions can define a number of reasons why that might unfold were either candidate to win full control. The good news? It is unlikely to end that way – but we will keep an eye on it anyway.
More Fed Talk….
As was demonstrated by the FOMC’s statement yesterday, there seems to be no rush to step into the election cycle and rush to hike the federal funds rate again.
Why? Well, in their words, “over the medium term as the transitory effects of past declines in energy and import prices dissipate,” and “[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][n]ear-term risks to the economic outlook have diminished.”
Clear as mud right?
That noted, keep in mind a rate hike during the last meeting of the year is still very possible (we hope likely).
But let’s consider this as well:
If their view of ““gradual” normalization of monetary policy” means a quarter-point increase once a year for the foreseeable future, then we can be pretty confident rates will remain awfully low for a while.
By the way, just in case you needed something to add to your threat calendar, Dr. Ed also reminds us that “since 1961 there have been nine bear markets in the S&P 500. Five of them coincided with the elections, and they were among the longest of the lot.”
With a bit over 36% of S&P 500 companies reporting Q2-2016 results so far…overall results are improving. Yes, fewer companies are beating revenue and earnings forecasts than at the comparable point of the Q1 season, but the YoY growth metrics are getting stronger.
Of the 180 companies in the S&P 500 that have reported (as of last evening – many more arrived this morning), 70% have exceeded industry analysts’ earnings estimates by an average of 5.7%. They have averaged a YoY earnings decline of 1.5%.
At the same time period in Q1-2016, a higher percentage of companies (74%) in the S&P 500 had beaten consensus earnings estimates but by a smaller 3.6% – and earnings overall were down a much larger 5.0%.
On the revenue side, 56% have exceeded sales estimates so far, coming in 1.3% above forecast and 1.5% higher than a year earlier. This is also better than last year when during Q1, 59% were above expectations, while exceeding estimates by just 0.1% – being flat YoY.
The data coincide with the idea that we are reaching closer to the end of the tunnel in the energy related earnings impact of the last 18 months.
The market is sniffing that improvement out overall and heading into higher ground – with no fanfare. That does not erase the normal internal chop so prevalent in each quarterly parade though. It’s something we just need to recognize as an on-going part of the deal.
Industry analysts have a long history of being optimistic about earnings results. They tend to be more so the further those results are out in the future.
Oddly, they then often act to lower their estimates in the weeks just before upcoming earnings seasons. As we have learned together over time, this can then lead them to being too pessimistic about the nearest quarterly results.
Long ago, Dr. Ed pointed out that tracking forward earnings tends to blend some of that chop out of the picture. It’s a time-weighted view of the average of analysts’ earnings expectations for the current year and the coming year.
While forward earnings can be a remarkably accurate predictor of actual earnings over the coming quarters, there is an important note to be made: analysts don’t see recessions coming. Hence, they end up drastically reducing their estimates only after one begins to unfold.
So it’s up to us to watch other indicators for recession risk – and then be patient.
As the burden of the energy sector adjustment wears off slowly but surely, forward earnings are turning bullish again.
On a weekly basis, which we note often for you in these morning updates, forward earnings had stalled (still at record highs though) for the S&P 500/400/600 since mid-2014, when oil and other commodity prices started to fall sharply.
On a positive front, as first highlighted in late June notes, recent weeks have witnessed all three moving into new, record-high territory. Forward earnings for each of the three market-cap groups are rising to new highs along with forward revenues.
Ugly politics or not, this remains a bullish footprint and is likely to surprise for many years to come, as the world adjusts to lower oil prices for far longer than currently expected.
The problem with slow moving forces (like demographics) is that they are best seen at a 50,000 foot view, from which few observe. That’s good in the end.
The forces move slowly – so much so that they are often just ignored and/or misunderstood.
That’s good too….
We suggest one remain focused on two things for the Barbell Economy:
- Focus on people first and then build action plans
- First inning, second pitch….long game, lots of extra innings
Until we see you again, may your journey be grand and your legacy significant.
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