On CNBC last Friday, we stated that we have been in a stealth bull market. Indeed, after anticipating the stock market’s bottom in early February, the stealth bull market emerged. So what’s a stealth bull market? Well, while the major market indices are marginally better year-to-date (YTD), many of the other indices are up double digits. For example, the D-J Industrial Average is up some 1.21 percent YTD, while the S&P Small Cap 600 is up 11.70 percent, the NASDAQ Composite has rallied 13.36 percent, the NASDAQ 100 +15.31 percent, well you get the idea. Moreover, many of those indices have tagged new all-time highs, as have most of the Advance/Decline Lines. As our friend Leon Tuey writes:
Those who are waiting for "clarity" have already "missed the boat" and when the major market indices hit new highs, no doubt, they will be complaining that the market is too high or that it is overvalued…The market's resiliency is not surprising. The market is telling investors that a "trade war" is unlikely. What is behind the market's strength is improving earnings momentum. Also, as mentioned in my recent reports, sentiment backdrop is ideal as fear is universal. Everyone is frothing at the mouth about the trade war. Moreover, the supply/demand condition is bullish. This year, corporate share buybacks reached a record. Meanwhile, investors continue to reduce equity holdings. The dummies are selling, but the smart/informed investors are buying.
Further, there is the chance we have entered a “buying stampede.” Recall that buying stampedes typically last 17-25 sessions, with only one- to three-session pauses/pullbacks, before they exhaust themselves on the upside. It appears to be the rhythm of the thing in that it takes that long to get everybody bullish enough to throw in the towel and “buy ‘em” just in time for a trading top to arrive. While it is true some stampedes have lasted 25-30 sessions, it is rare for one to go more than 30 sessions. If this is such a stampede, today is session 11.
Meanwhile, we have entered earnings season, and my conversation on CNBC turned to the financials and why they are not responding to good earnings. We said that too many investors are paying attention to the yield curve thinking the financials are not going to do very well until the yield curve steepens. We also stated there are financials and then there are financials. While it is true the large cap banks have stalled out, the brokerage stocks have done pretty darn well. Likewise, the small cap banks have done well. This small bank stock performance is reflected in David Ellison’s Hennessy Small Cap Financial Fund as well as Anton Schultz’s RMB Mendon Financial Services Fund. Speaking more to this earnings season, over previous quarterly earnings reports, earnings have tended to come in better than most expected. We do not think it will be any different this time. In fact, consensus estimates suggest that there will ~20 percent earnings growth over the next four quarters. One credible service is actually forecasting $200 in earnings for the S&P 500 in 2020. If that is anywhere near the mark, it implies the S&P 500 (SPX/2801.31) is trading at 14x 2020’s earnings estimate. Using this year’s estimate (~$158) yields a price to earnings (P/E) ratio of 17.7x, while using next year’s (~$174) produces a P/E of ~16x. And, it is not only earnings that are soaring, but revenue growth has kicked in, as well (charts 1 and 2).
Moving on to some of last week’s economic reports, our friend Joe Brusuelas (Chief Economist of RSM) had this to say:
While, the labor market remains historically tight the pace of U.S. inflation is now outpacing wage gains late in the business cycle. Inflation on a year ago basis is up 2.9 percent compared with the 2.7 percent gain in average hourly earnings amidst no gain in real average hourly earnings over the past year. Given that the U.S. is now ensnared in a three front trade war which will in the near to medium term result in higher prices policymakers at the Fed are likely to find themselves in quite the dilemma in early 2019 when its rate policy will reach a point when it becomes restrictive as the impact of the trade conflict bites and prices increase. Investors and firm managers should brace themselves for rising prices, reduced purchasing power, and a loss of competitiveness due to explicit policy choices in Washington and an economy growing well above trend (chart 3).
Clearly, the U.S. economy is hitting on all cylinders and business optimism, for whatever reason, is leaping (chart 4); business is good. We will get more news on the economy this week, for as our economist, Scott Brown Ph.D., writes:
This Week — There may be some market reaction if we get a surprise in the retail sales report, but the focus is going to be on Fed Chair Powell's monetary policy testimony to the Senate Banking Committee (Tuesday). Powell's written testimony will be released an hour and a half before the hearing begins, but there's always a chance that something will come up in the Q&A. Powell will repeat his testimony to the House Financial Services Committee on Wednesday.
Returning to the subject of the stock market’s action last week, we found the always insightful Lowry’s Research Organization’s weekend notes particularly interesting. To wit:
So, how do these deteriorating market conditions compare with conditions today? Actually, they don’t. But, they do contrast from today’s market. For example, rather than deteriorating, market breadth continues to expand, with both the NYSE all-issues and our operating companies only (OCO) Adv-Dec Lines reaching new all-time highs this week. And, expanding breadth is apparent in all three market segments, as the S&P and OCO Large, Mid and Small Cap Adv-Dec Lines each recorded a new all-time high this week. Supply and demand trends today also offer contrasts, as Buying Power remains in a long-term uptrend, climbing to within four points of its March rally high this week, while Selling Pressure fell to lows last seen over 70 years ago. In addition, the percentage spread between the Buying Power and Selling Pressure Indexes reached its most positive level since 2004 this week.