Best Start To Year - For Stocks - Since Late '80s, Early '90s?

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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: Brian Gilmartin, CFA
Summary

CNBC was throwing all these headlines out on Friday, after the February '19 month-end benchmark results were calculated, and it appears that in 2019, the Dow 30, S&P 500 and the Nasdaq are all on track for their best start to the year since either 1987 or 1991, probably depending on the index.

Readers can see that Q1 '16 saw the worst degradation in the Q1 '16 S&P 500 EPS estimate over the first two months of the quarter, and yet the S&P 500 returned roughly 1.5% in Q1 '16 and returned 12.5% for calendar 2016.

My own expectation is that 2019 will turn out the same way.

CNBC was throwing all these headlines out on Friday, after the February '19 month-end benchmark results were calculated, and it appears that in 2019, the Dow 30, S&P 500 and the Nasdaq are all on track for their best start to the year since either 1987 or 1991, probably depending on the index.

1991 was the start of Gulf War I, and the fourth quarter of 1990 wasn't that different than the fourth quarter of 2018, when crude oil spiked after Saddam Hussein invaded Kuwait, the S&P 500 corrected sharply, and the mainstream media made it out that the world was poised on the precipice of World War III given the size and capability of the Iraqi Army (Didn't quite turn out that way).

Yesterday's blog post detailed that I thought S&P 500 earnings would gradually strengthen as the calendar rolled through 2019 and compared 2019 to Q1 '16.

Here was a post this weekend from Callum Thomas (@Callum_Thomas) using FactSet data that highlights our reference to Q1 '16 earnings action:

Readers can see that Q1 '16 saw the worst degradation in the Q1 '16 S&P 500 EPS estimate over the first two months of the quarter, and yet the S&P 500 returned roughly 1.5% in Q1 '16 and returned 12.5% for calendar 2016.

My own expectation is that 2019 will turn out the same way.

Look again at yesterday's blog post: once through Q1 '19, it could be a decent year for S&P 500 earnings. Brexit is likely fully discounted, and China trade talks will likely see the US gain ground on the intellectual property issues.

Summary/conclusion: S&P 500 earnings are a poor market-timing tool, but the S&P 500 needs to make an all-time high to put this correction to bed. Looking at historical S&P 500 returns relative to earnings growth, and you can see that in 2013, the S&P 500 returned 32%, but its earnings grew 6% that year (we were still seeing heady charge-offs and litigation charges in the Financial sector) and then 2018, where the S&P 500 grew earnings 23-24% and the return on the benchmark for the year was -4.35%.

It's one opinion and take it with a substantial pessimism, but I think S&P 500 earnings will be fine in 2019 and should gradually improve through calendar 2019.

The real question is, have we seen the majority of the S&P 500 gains for the calendar year already? Through the first two months of 2019, already it's a slightly better-than-average year for the S&P 500 return.

Thanks for reading.

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