64 replies to this topic

[Rich C]

Second quarter GDP came in at 4.2% on the second estimate in late Aug.  The Fed meets next week and is expected to raise the funds rate 1/4%, but the market is expecting it so I don't think there will be much reaction.  Market valuation climbed a bit in Sept., with the 12 month trailing GAAP S&P 500 P/E up to 23.7 because Q2 earnings have been set for a while and the market has rallied a little.  23.7 is moderately overvalued relative to my 30 year trimmed average of 19.  Earnings are expected to be up 20% YoY for Q3, with about half of that coming from the tax cut.  Geo-politically the major risk is the trade wars, particularly with China.  The tariffs are hurting some companies significantly, but apparently not the majority of US businesses.  Price action is flat for Sept, but remains solidly within the up channel it has been in for most of the last decade.

 

Conclusion: The long term bull market continues. 

 

More details on my blog, the link is below.

[Rich C]

The third estimate of Q2 GDP remained at +4.2%, and the Oct. 12 GDPNow estimate for Q3 GDP is 4.0%, so no recession in sight.  The Fed raised rates by 1/4% at their Sept. meeting to 2.1%, and the long end of the yield curve moved up a little more than most expected, which triggered a correction.  This seems typical for late expansions, the Fed raises and eventually someone notices.  At this point, the market usually corrects, then realizes this level of rates is not a long term threat to the market, that will come later after more hikes (the Fed is hiking very slow, only 1/4 point at a time, in the past they have gone 1/2 point and from a higher base).  The trailing 12 month GAAP PE fell from 23.7 to 22.2, based on the market correction, and relative to my 30 year trimmed average of 19.  The administration has struck a deal with Mexico and Canada, the USMCA, and while it probably won't drive GDP, getting the uncertainty out of the way is a plus in the short term.

 

The housing market is weak right now.  Thirty year fixed mortgages are up to 5%, and while that is not historically high, home prices have inflated faster than wages, so the combination of 5% mortgage and rising rates, with higher prices is going to start disqualifying more and more buyers.  If you need to sell your house, and you can't make rates come down, you will have to drop the price on your house.  Will the slowdown in housing spread to the broader economy? 

 

Conclusion:  The long term bull market continues, but a few concerns are out there.

[Rich C]

It's that time of the month, to take a look at things.  Earnings season has gone very well, with S&P earnings up 25% over last year.  With the drop on stock prices, this has taken the trailing 12 month GAAP P/E down to 20.8 from 22.2 last month, relative to my 30 year trimmed average of 19.  Interest rates rose a bit after the Sept. hike, but with the stock market correction rates have returned to their Sept. levels on the longer end of the yield curve.  Technically, on the long term chart, RSI has fallen from overbought to neutral, MACD has headed down, and price remains in the long term channel it has been in for the last seven years.  Geo-politically, the major issue is our trade dispute with China, which causes real pain in certain industries domestically.  The rising interest rate environment has slowed housing.  We've had 5% mortgages before, even 8% and 10% mortgages, but we have not had those rates when the median home price was $320K.  Home prices can inflate at a more rapid rate than the general economy as long as rates remain ridiculously low, but when they rise sufficiently, that creates a problem in housing.

 

I conclude that the long term bull market continues, but risks are rising.

[Rich C]

The second estimate of 3rd qtr. GDP was 3.5%.  The Fed hiked the funds rate a quarter of a point today to 2.5%, but said for 2019 they will hike twice instead of the previous expected three times.  Drops in longer term interest rates have flattened the yield curve a bit.  The trailing 12 month GAAP P/E on the S&P 500 fell to 20.3 from 20.8, relative to my 30 year trimmed average of 19, just slightly overvalued.  Technically, the market has fallen a bit below the bottom of the bullish upchannel it has been in for over 6 years, which is a significant caution sign for a long term investor.  The China trade war represents the biggest geo-political risk and we all await signs of progress in the 90 day negotiation taking place currently.

 

For a long term trader willing to ride out some rough spots, its still a long term bull market.  However, the risk has risen and if weakness continues down and lasts longer, it could turn into a bear market.

[Rich C]

The third estimate of Q3 GDP came in at +3.4%, a good reading.  GDP now is estimating 4th quarter GDP to be +2.8%, giving us a +3.1% year.  The Fed has made more dovish pronouncements since Powell's hawkish interpreted statements after the Dec. Fed meeting where they hiked by a quarter percent.  Valuation has moderated over the last 4 months to very near the long term average P/E ratio, so the market is not overvalued.  Factset projects earnings to come in 10% above last year for Q4, the 5th consecutive quarter of double digit gains, but also the lowest percent increase of the year (other y-o-y increases were in the 20% range).  In Dec. the market dipped below the lower band of rising channel the market has been in for several years, but the Jan. recovery has almost gotten us back into the channel.

 

It is clear we've had a significant correction.  It is not clear to me that the market has fundamentally changed into a primary bear market.  That could materialize in the next few months, but right now, I think the primary bull market that started 10 years ago remains in effect.  There are more details in the blog, link is below.

[Rich C]

Rates remained unchanged and the Fed sounded more dovish, and that has helped the stock market.  The first estimate for Q4 earnings is late due to the shutdown, but the GDPNow estimate from Atlanta Fed is at 1.5%, no day at the beach.  Investor confidence has been shaken by the stock market action since October.  The 12 month trailing GAAP P/E on the S&P 500 rose from 19 to 20 based on the rally in Jan/Feb, and I used Q4 earnings with 85% of the companies reporting.  The S&P price has climbed back up into the long term uptrend channel of the last few years and that is encouraging.  The market expects some favorable action from the China trade talks, some progress, no increase in tariffs, and extend the process 60 days.  That may be priced in already on this rally, and it could be a sell the news event.

 

The big picture items I watch for a long term assessment look reasonably good right now.  However, I am concerned about the analysts cutting the earnings forecast for Q1, Q2, and Q3 to low single digits, with a small contraction in earnings for Q1.  I don't see how we get to a robust year in 2019.  I caught part of the Jan/Feb rally, but I've been taking profits.

 

The long term bull market continues.

Edited by Rich C, 22 February 2019 - 12:01 AM.

[Rich C]

Rates remained unchanged at the Fed meeting that concluded today and the "dot plot" showed no rate hike anticipated for 2019.  The Fed is "data dependent" again.  GDP for Q4 was +2.6% on the Feb. report, giving a +3.1% for 2018.  Valuation of the S&P is mildly elevated, with the 12 month trailing GAAP P/E at 21.3, relative to my trimmed 30 year average of 19, still using Q4 and the prior 3 quarters.  The price action on my long term chart is encouraging since it is solidly back in the long term up-channel we have been in for years.

 

I remain concerned that Factset continues to project that Q1 earnings will decline a little vs. the prior year, and Q2 and Q3 will show low single-digit increases.

 

The bull market continues.

[Rich C]

Interest rates are unchanged from last month, and appear on hold for a while.  GDP for Q4 came in at +2.2%, revised down a bit from last month's estimate.  The Atlanta Fed GDPNow estimate for Q1 GDP is +2.3%, a decent number.  Valuation wise, the trailing 12 month GAAP P/E on the S&P 500 moved up to 21.8 from 21.3, compared to my 30 year trimmed average of 19, as stock prices moved up, but I am still using Q4 earnings as the most recent quarter.  The only major geo-political event likely to move the market near-term is an agreement with China on trade, and that should be a small plus when signed as I think much of the good news has already been priced in.  Technically, the long term chart looks good.  RSI is rising but not overbought at 63, MACD looks like it wants to turn up, and price action is moving to the center of the up-channel we have been in the last few years, recovering from the bottom of the channel back in December.

 

The major concern is the earnings estimates from Factset, which show earnings in Q1 4.3% below last year, flat for Q2 (-0.4%), and only mildly positive for Q3 (+1.4%).  Estimates can be wrong and are subject to change, but if that is the way 2019 plays out, I would not expect a significant rise in the market this year.  In calls with CEO's, Factset reports the two major factors cited in weak earnings are the strong dollar and wage increases.

 

The long term bull market continues, IMO.

Edited by Rich C, 17 April 2019 - 11:35 AM.

[dasein]

for the LT - https://fred.stlouisfed.org/

[Rich C]

The Fed is on hold but the market has brought longer rates down a couple of tenths of a percent.  GDP for Q1 was +3.2%, but the inflation deflator in Q1 was much lower than Q4, resulting in a higher than expected GDP, so that stat is suspect.  The trailing 12-month GAAP P/E on the S&P was 21.4, down from 21.8 last month.  I used Q1 (90% reporting) and the prior 3 quarters, and it is moderately overvalued relative to my 30 year average trimmed P/E of 19.  The market thought a trade deal with China might be close but those hopes were dashed last week and the market corrected 5%, not bad at all.  Technically the long term chart is uninspiring, but the price action remains solidly in the long term up-channel we have been in for years.  Factset analysts still project Q2 earnings to be down a little vs last year (-.5%) and Q3 to be only minimally up vs last year at +1.4%.  I don't see any major problem, but it is difficult to make the case for a raging bull market this year.

 

For me, the long term bull market remains in force!