By: Dividend Sensei
Click here to read up on the intro to this portfolio, the theory behind it, and its methodology.
Weekly Economic/Market/Earnings Data Review
First let me apologize for how late this update is. I was terribly sick the past two weeks and so it was all I could do to keep the regular flow of DS.com content going.
But now I’m back to 100% health, so let’s get caught up on the last two weeks, because it was a very busy time for the DVDGI.
First, in market news the last two and a half weeks were marked by declines, due to numerous geo-political and domestic chaos in DC. However, despite what some may have perceived as market pain, the S&P is down only 1.5% since August 7th, and fell only 2.2% from its all time high, before yesterday’ strong rally.
In other words, the last few weeks, while apparently full of strife and investor fear (CNN Fear/Greed Index fell to 17/100, indicating extreme fear and its lowest in about a year), was nothing but noise.
In fact it can’t even be classified as a dip, (5% decline from all time high), much less a correction (10%), bear market (20%) or crash (30%).
Meanwhile earnings season has pretty wrapped up and it was a very solid one, with 73% and 69% of companies beating their EPS and revenue expectations.
Overall S&P 500 sales and earnings earnings grew 5.1% and 10.2%, respecitvely, YOY in Q2, and as you can see, most of that was driven by multi-nationals with strong exposure to interenational markets.
That’s in part due to the weakening dollar, which helps boost top and bottom growth from overseas operations.
Of course, part of the reason that the market has reacted so lackadasically to this good news is that 70% of this growth came grom just three sectors, energy, tech, and finance.
Further good news is that the amount of companies issuing negative guidance for the rest of the year (tapping down expectations) is 63% (of the 94 companies that have issued Q2 guidance).
Now that may sound bad, but actually this is normal, as over the past 5 years 75% of companies will lower guidance to sand bag their actual results making it easier to beat on expectations.
What matters far more is that the rest of the year looks like it will be a solid one for sales and earnings growth, especially considering the failure of Congress to push through any fiscal stimulus (tax cuts or infrastructure spending).
In fact, based on the latest projections, the S&P 500’s forward PE ratio is now down to 17.4, compared to 17.8 six months ago. So that decline in valuation, in the face of a solid market advance this year, is certainly a good thing.
Of course we can’t forget that over the past five and 10 years respectively, the S&P 500’s average forward PE was just 15.4 and 14.0. So while the market remains historically overvalued, that overvaluation is actually declining in the face of solid corporate earnings growth, which itself is highly impressive given the overall slow rate of global economic growth.
Of course, we also have to keep in mind that in 2015 and 2016 the S&P 500 faced an earnings recession, thus 2017’s strong growth is coming off a low hurdle rate. 2018’s growth is likely to be more challenging barring a retroactive corprate tax cut (tax reform is now pretty much impossible before 2018 midterm).
Of course what ultimatley drives earnings growth is economic growth so how do things look on that front?
Well pretty good actually.
Source: Hoya Capital Real Estate
Retail sales rose 0.5% compared to last month, much higher than expected (0.3%) though most of that was due to the blockbuster success of Amazon Prime Day, which goes to show the power and reach that e-Commerce giant has.
Further good news came from the port of LA, which announced that traffic is at an all time high, while the Michigan Consumer Confidence index rose strongly, and is now near a 20 year high.
Meanwhile housing prices continue to rise, thanks largely to continued supply constraints (new building permits continue to be weak).
Finally, manufacturing continues to rebound strongly, (again largely due to the weaker dollar boosting overseas sales), which explains why the New York, Atlanta Fed’s (and analyst’s) Q3 GDP projections continue to trend upwards.
Of course, as you can see their is a wide range of estimates for Q3 GDP growth, ranging from 2.1% to 3.8%. Since these are all based on real time economic data, what matters isn’t necessarily the absolute number but the positive trend indicating the economy is getting stronger.
That’s why the overall risk of recession remains negligble, both on a 3-4 month and 9 month basis.
Source: Jeff Miller