64 replies to this topic

[Rich C]

Q3 GDP came in up 33.1%, in line with the Atlanta Fed estimate from last month.  That is an annualized number so we were up 8% for the quarter, cancelling the poor showing in Q2.  Earnings came in better than the Factset estimate for Q3, down only 7% vs. 2019, but still a poor number.  The trailing 12 month GAAP PE on the S&P rose again to 36, with the latest quarter being Q3 (92% of stocks reported).  Factset projects earnings in Q4 to be 14% below the year prior quarter, still poor.  There was almost no movement in the bond market over the month, and bonds are no alternative to stocks.  The banks rallied again this month on the announcement of two viable COVID 19 vaccines, so there is an end in sight to mortgage forbearance.

 

But, the COVID virus fall wave continues to ramp up, cities and states are restricting peoples movement to slow the virus, and that will harm the recovery in Q4.  The election is settled for all practical purposes.

 

The bull market continues, but the valuation is dangerously high and with COVID 19 on the rampage, a correction could be near.

[Rich C]

The second estimate of Q3 GDP was unchanged at +33%, while the latest GDPNow estimate from the Atlanta Fed for Q4 GDP is +11%, which is an annualized number and a healthy one.  The Fed remains on hold with interest rates while they suggest the govt. needs to step up with fiscal stimulus.  The trailing 12 month GAAP PE on the S&P is 37 times earnings, up again from last month.  Factset projects that Q4 S&P earnings will be 10% lower than 2019, an improvement over last month's projection of 14% lower.  Following the bank stress tests, the Fed announced Friday that the big banks can begin stock buybacks in 2021 if their earnings allow it, which is good news in the important banking sector.

 

Covid 19 is raging in many areas of the US, with ICU beds full in a few locations and near full in many more.  The vaccine is just beginning to roll out, but it appears we are at least two months until an appreciable affect will be seen, based on the number of people who have received it.

 

The bull market continues, but the valuation is dangerously high and with COVID 19 on the rampage, there is significant risk in this market.

[Rich C]

The third estimate of Q3 GDP was +33.4.  GDPNow estimates Q4 GDP to be +9% annualized rate.  The Fed is on hold, but the market is pushing up longer term rates with the 10 year Treasury at 1.1%.  Rates are rising based on the Covid vaccine rollout and expectations of improved economic activity in 2021, and dollar weakness.  The trailing 12 month GAAP PE on the S&P is 34:1, so it remains richly valued.  The rich valuation has been justified by the low rates, but as rates rise and higher rates are plugged into investors "discounted cash flow" models, the multiple will eventually need to shrink, or earnings will have to rise significantly.  S&P earnings for Q4 are projected to be 9% below the 2019 level, but Q1 earnings should show a mid-teens increase over a weak 2020 level.

 

Covid is raging across the US and that should be a headwind to growth in Q1.

 

The bull market continues, but valuation and the virus pose risks to the market.

[Rich C]

The first estimate of Q4 GDP was +4%, the first number that resembles anything like normal in the last year.  The Atlanta Fed's GDPNow estimate in Dec. for Q4 was +9, so they missed badly 30 days out.  My guess is that they didn't factor in the Covid19 infection rate spiking and pulling down economic activity.  The Fed Funds rate is unchanged at .2% and longer term rates that moved up in January remain unchanged from that level in Feb., and the Fed reiterated they are on hold.  The trailing 12-month GAAP PE on the S&P jumped up to 42 because the market is climbing but earnings are not.  Eventually we will revert to the mean, but most suspect that will start when the Fed signals they have begun a tightening cycle, or maybe when they say they thought about tightening a little (remember the "taper tantrum").  S&P 500 blended earnings for Q4 surprised to the upside, +1% compared to the year ago quarter, where the Factset projection was -9%.  Technically, the ten year chart of the S&P looks good, but it is in overbought territory.  If Congress doles out another $2 trillion, and we get lots of people vaccinated, economic activity should pick up by spring or summer at the latest.  It will be interesting to see what behavior changes we made during the pandemic will stick and which will revert back to pre-pandemic norms.

 

The bull market continues.

[Rich C]

GDP in Q4 was +4% and for Q1 the Atlanta Fed GDPNow estimate is +8% which is strong growth.  Their estimate may prove a little too strong given the polar vortex in mid Fed. and the Covid spike in February.  The Covid spike has come down, but I worry a bit about the new variants that are more transmissible.  We're in a race with the vaccine.  The Fed meeting ended with Powell being dovish, but the bond market pushed up longer dated maturities.  The stock market is more likely to respond to the longer end of the curve, so the Fed may buy longer dated bonds to blunt the advance.  The 12 month trailing earnings GAAP PE is still 42 which is dangerously overvalued, but in fairness it is at its worst, encompassing four rotten quarters.  When I look at forward PE's, I see guesses ranging from 19, 21 and Standard and Poors is at 24.  If you can make up an earnings number for the 12 months ahead, then you can make the PE be anything you want.  Whose forward earnings guess are they using, S&P, Factset, JP Morgan, Goldman Sachs?  Everyone has a guess, and none have any more credibility than the next.  But you know what, they ALL show the market is overvalued on a PE basis, and as the five and ten year treasuries rise, in discounted cash flow analysis, the calculated market multiple contracts.  Eventually there will be a reversion to the mean, but how it is accomplished, we don't know.  Earnings could go up, or stock prices can come down, or both.  I suspect that is a way off.  Factset estimates that earnings in each quarter of 2021 will be about 20% above the corresponding 2020 quarter, except in Q2 they will be significantly higher because Q2 2020 was so bad.  But, those earnings will only get us back to 2019 levels.  It is possible that 2021 could be a year of anemic returns since stock prices in 2020 seemed to price in the recovery already.  That would be a rational response in my opinion, but the stock market is not always rational.  Technically the ten year chart of the S&P looks good, but the price action is up at the top of the channel, bringing into question whether it can push above the top of the long term trend.

 

All indications are that we remain in a bull market, but one that is richly valued.