Corrections Happen: This Is Still A Bull Market

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: ANG Traders
Summary

The S&P 500 has grown by 330% during the current expansionary period.

The economy continues to expand, albeit at a slower pace.

Expanding economies do not cause bear markets.

Corrections in equity prices are a normal part of bull markets (even powerful ones, like this one).

We all need to keep in mind that the SPX has rallied 60% over the course of the last three years and 330% in the last 10 years. Corrections are a normal part every bull market and a 20% drop doesn't even reach the primary trend-line for the S&P 500.

This week, we continue with the theme that the economy - despite the decreased rate of increase, which means the second derivative is negative, but the first derivative remains positive - continues to grow and that the Q4 pullback was a correction, not the start of a bear market in equities.

Industrial production

Production came in at +4% yoy.

Source: tradingeconomics.com

A longer view shows that industrial production remains just off the recent eight-year high.

Source: tradingeconomics.com

Manufacturing Production

Splitting off manufacturing, we see a greater increase compared to the month prior.

Source: tradingeconomics.com

And the longer view shows that it's in the higher end of the eight-year range. Source: tradingeconomics.com

Capacity Utilization

Capacity utilization continues to increase.

Source: tradingeconomics.com

And is only approximately 1% below the 10-year high.

Source: tradingeconomics.com

Q4 Earnings (up to Jan. 2019)

From factset:

  • To date, 11% of the companies in the S&P 500 have reported actual results for Q4 2018.
  • In terms of earnings, more companies are reporting actual EPS above estimates (76%) compared to the five-year average.
  • In aggregate, companies are reporting earnings that are 3.2% above the estimates, which is below the five-year average.
  • In terms of sales, fewer companies (56%) are reporting actual sales above estimates compared to the five-year average.
  • In aggregate, companies are reporting sales that are equal to estimates, which is below the five-year average.

Year-over-year earnings growth rate for Q4 is 10.6% today, which is the first time the index has not reported earnings growth above 20% since Q4 2017. However, keep in mind that it will also mark the fifth straight quarter of double-digit earnings growth. The earnings growth is slowing, but it continues to grow at a double-digit rate.

Consumer Confidence

The University of Michigan's consumer sentiment dropped suddenly and significantly in the first two weeks of January. It would be reasonable to assume that the drop was a direct result of the partial US government shutdown and that sentiment will improve once the shutdown is over.

Source: tradingeconomics.com

Longer term, consumer confidence has been volatile but generally increasing.

Source: tradingeconomics.com

Retail Sales

The Johnson Redbook Index measures the growth in U.S. retail sales. Despite the lower consumer confidence, retail sales have continued to grow.

And a dip in the growth rate of retail sales is normal, following the holiday shopping season. The decreased consumer confidence is not reflected in the retail sales.

Source: ANG Traders, tradingeconomics.com

There's every reason to expect that consumer confidence will improve once the uncertainty of the shutdown is removed.

In conclusion, the economy continues to grow, which means that the drop in equity prices was a correction, not the start of a bear market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.