Since secular bull markets generally end in a hail of good feelings and optimistic media and public pronouncements, it is safe to say we’re not there yet. Take this piece, for example from CNBC contributor Jeff Cox (a.k.a The Bad News Bearer–June 6, 2013): “When earnings look this great, it is actually a really bad time to invest in stocks.”
Cox contends that because we have just ended a quarter where S&P 500 earnings grew at nearly a 25% clip that this may be as good as it gets. On top of that, the index itself was only up a meager 1.5% since the beginning of the year … not a glowing performance. Of course he fails to mention that the S&P was up in the area of 17% last year in anticipation of a corporate tax cut (35% down to 21%, -40%) driven earnings improvement. As the tax cut is a one-time benefit or boost, however, he opines earnings growth should recede as we move forward … not a good thing for stock prices.
Stock Market 101
As every good market maven and pundit (including Cox) should know, the stock market is a discounting mechanism. It weighs and processes economic, geopolitical, political and earnings data in advance to come up with a current valuation on stocks. Last year’s S&P performance was a reflection of pricing in the one-time earning boost coming from the tax cut in what was already a generally strong fundamental backdrop for earnings. The negligible move thus far in 2018 reflects the waning earnings growth benefit from the tax cut coming next year. It may not yet be pricing in the potential for strong earnings ex, the benefit of the tax-cut windfall. In other words when you put together the benefits of a $1.5 trillion increase in tax-cut-generated spendable income on the part of the public and corporations, plus $1.5 trillion in tax-cut-generated deficit spending on the part of Uncle Sam and a continuing world-wide economic recovery, we could still be in for substantial additional upside earnings growth surprises.
Does this preclude significant market drops? No. Corrections, even a cyclical bear market, could easily be in the cards. But I believe in the longer term this market has greater upside. Remember, since the first time we hit 1550 on the S&P 500 (March of 2000) to its present value, 2713, the S&P has compounded at 3.15% annual rate (excluding dividends). This is well below historical equity returns in the 7 to 8% range … 18 years of sub-trendline performance.
As is always the message with kortsession.com: the media (Cox, et. al.) is no help!
My thanks to trusted source, Jeff Miller–(“Weighing the Week Ahead … )”, for turning me on to another Seeking Alpha contributor, Lloyd Clucas (“If you want to see bears, go to the zoo”). In a period where not much has changed, Clucas’s admonitions below are well worth your attention.
“The media-driven issue of the day is virtually always misleading. Ignore all of them. If you insist on watching CNBC, be sure to leave the sound off. Leave it off unless you actually know the person is worth listening to. Of course that usually requires years of experience – not just your emotional preferences. Leave the latter to your evening cable show watching. And leave it entirely out of your investment decision-making.