The Winter Of Our Discontent (And Spring Of Hope?)

Summary

• Today marks the 46th day of winter – the midway point of the 91-day season.
• Wall Street’s tale of the tape for the first half of winter began with a market bottom on December 24.
• Also, as of February 1, fourth-quarter GDP is expected to be +2.5%, meaning “no recession in sight."

By Gary Alexander

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…

– The opening lines of “A Tale of Two Cities” by Charles Dickens

To quote Shakespeare, last December marked what looked like “a Winter of our Discontent,” but then Charles Dickens’ more balanced laundry list gave us the full story: It was both the best of times – the best stock market gains in January in 32 years – and the worst of times, the worst December since 1931.

So which month is telling the truth – Depressing December or Joyful January?

Today marks the 46^th day of winter – the midway point of the 91-day season. Wall Street’s tale of the tape for the first half of winter began with a market bottom on December 24. The fall season (aptly named this year) brought a 19.8% fall in the S&P 500 – just short of an official “bear market” (-20%) designation. Since then, the S&P has recovered by 15% on a closing basis (in just 26 trading days since December 24).

Act III is yet to come. Will we see another “worst of times” or just a “pause that refreshes”? (It’s highly unlikely we’ll see another 15% gain in the next 38 days. Trees don’t usually grow that rapidly in winter.)

Last year, I hate to remind you, the markets soared by an equivalent amount in January – until the last three trading days of the month, when the market began a horrendous 10% decline in 10 trading days. Could that happen again? Anything’s possible with algo-raiders, but the numbers don’t justify a collapse.

Most Fundamentals Imply Further Market Gains

Earnings are coming in slightly better than expected. As of February 1, according to FactSet, 46% of S&P 500 companies have reported fourth-quarter earnings and revenues, with 70% reporting positive earnings surprises (exceeding analysts’ estimates), with blended year-over-year (y/y) earnings growth of 12.4%, slightly above expectations of 12.2%. While 12.4% is down from the phenomenal 24+% gains in earlier quarters, any gains over 10% would be outstanding. Although we’re not yet halfway through the reporting cycle, the last quarter of 2018 should mark the 5^th straight double-digit gain for earnings, the 11^th straight quarter of revenue growth, and the 10^th straight quarter of y/y corporate earnings growth.

Also, as of February 1, fourth-quarter GDP is expected to be +2.5%, meaning “no recession in sight.”

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The stock market is up partly based on an expected solution with China over its trade policies. China is in danger of a debt implosion or recession if they don’t mend fences with the U.S. Meanwhile, President Trump has tweeted that China’s slower growth rates should compel them to make a ‘real deal’ on trade.

The euro region is also slowing down. Last quarter, Italy’s economy contracted for a second consecutive quarter, the definition of a recession. Germany barely escaped entering a recession. Italy’s public debt is 130% of GDP. France raised fuel taxes and has suffered a variety of street protests. Italy is looking more and more like debt-ridden Greece once looked, so the U.S. is still the steadiest economy in the world.

Last Friday’s jobs report was excellent. It appears that we have gone well beyond “full employment” to a growing “labor shortage.” Reports from the Fed’s January 2019 Beige Book said, “…all Districts noted that labor markets were tight” and “firms were struggling to find workers at any skill level.” The previous Beige Book suggested that severe labor shortages were seen mainly at low- and middle-skill levels, but this time the Dallas district noted a lack of both high- and low-skilled workers, especially in construction, energy, hospitality, healthcare, banking, and transportation. Contacts in the San Francisco Fed region “observed intense compensation pressures for more highly skilled workers,” and a majority of Kansas City area respondents “continued to report labor shortages for low- and medium-skill workers.” Boston noted that finding workers was difficult, but “one contact reported that after a ‘market adjustment’ raised compensation by 10 percent to 15 percent, difficulties in hiring and retention dramatically eased.” A Minneapolis district retailer noted that “every business is hiring, and the hiring pool is shallow.”

The January Beige Book also reported wage increases across all skill levels. New York district employers are “budgeting for moderately larger wage increases in 2019 than they did for 2018.” Philadelphia area contacts “typically cited increases for wages and benefits that averaged 3.0 to 3.5 percent. In one of the District’s tightest labor markets, average wage rates were up 6.0 percent over the prior year.”

Putting these numbers together, we should see a gradually rising market in the upcoming Spring of Hope.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.