Five weeks ago, I told Seeking Alpha readers to get ready for a V-shaped recovery in the U.S. economy. If you missed my article at that time, you can check it out here. In the article, I made the case that the market bottomed on March 23 of this year. I predicted this bottom for my subscribers and followers in my article on March 19. If you don’t believe me, you can check out that article here.
The S&P 500 is now up 32.6% since that article. I also called a bottom in Boeing (BA) in that same article. Boeing is now up 94.5% since then.
In my most recent article, I disclosed one of the rules that I have learned to live by during my 23 years as a professional money manager and analyst. This rule is most relevant today in an extremely divided world, where many headlines on both sides seem to have an agenda. Here are some rules of the road I continue to practice:
Rule Number One
The market is not going to do what you want it to do. You cannot invest in your opinion, your bias, or in the headlines that you agree with.
I have mentioned before that the doomsday headlines were not based on facts. What facts did I have that they did not? Two very important ones were left out. First: here's a reminder of the second rule that I follow as it pertains to the market.
Rule Number Two
You will get a lot better feel for the market by looking at 100 one-year charts than you will from reading 100 headlines.
I have a database of 5,300 different securities that I rank daily. I rank this database on valuation, short-term momentum, long-term performance, and a combination thereof. Out of this daily ranking process comes a list of about 300 securities that like cream rises to the top. This narrows down my search daily from 5,300 to just 300. This is a very valuable tool to start my day with.
I then look at one-year charts of these 300 or more stocks every single trading day. Charts do not have an agenda, an opinion, or a bias. Instead, they tell me what the market thinks. As investors in the market, we should listen carefully to what the market is telling us rather than us telling the market what it should do.
Back on March 19, the charts of the vast majority of stocks were telling me that most of them had stopped going down and were in the early stages of going sideways. This is the first step of the market beginning a comeback. It has to first stop going down. This early sideways pattern was the predominant pattern of the vast majority of stocks that make up the indexes.
Charts are not the end-all, but they are a great indication of what the market is saying. The charts that I looked at did not agree with the numerous doomsday headlines. But there also was another very important fact that was contrary to the bearish articles. I will get to that next.
Arguing with the market about your macro outlook or your opinion of a security rarely turns out well. In the end, the market will always be right. While you may be letting your political leanings, opinions, or doomsday prophets guide your decisions, the market is following its three most important factors: Earnings, earnings, earnings.
This is the other fact that the negative articles on the market were failing to mention. I also mentioned this rule in my last article. Once again, here's a reminder of the fourth rule that I follow:
Rule Number Four
Stocks and the market follow earnings and earnings expectations.
But, wait a minute, Bill Gunderson, you left out rule number three.
I will jump back to it in a moment. I first want to emphasize and re-emphasize rule number four, because it was the biggest fact that the doomsday writers did not consider in their apocalyptic predictions for the market and the economy.
While the earnings expectations were plunging for the year 2020, due to a temporary pandemic, they failed to tell you that the earnings for the S&P 500 have been going up every year since 2009 and that we had record earnings in 2019. For this reason, we had a record-breaking bull market that lasted for 12 years.
The market did indeed follow earnings during that entire stretch. Earnings were the north star that I followed during that record run. But, wait a minute, you say that the markets also follow earnings expectations, what do mean by that, Mr. Gunderson?
On Friday, we witnessed a blowout jobs report. The street was expecting a loss of 2 million jobs, instead, we had a gain of 8.5 million jobs. This was the most incredible job report that I have seen during my more than two decades in the business. The DJIA went up more than 800 points on Friday not because earnings suddenly went up. The market went up because earnings expectations went up.
Likewise, the market did not go down back in March because earnings went down. In fact, earnings season did not even begin until the second week in April. That Q1 2020 earnings season is now over and earnings did indeed drop about 13% vs. the same quarter last year. The market went down in March because earnings expectations went down.
Now back to the other fact that the writers of the so-called coming apocalypse left out either ignorantly or conveniently: Earnings expectations for 2021 and 2022 were still calling for record earnings for the S&P 500 to begin once again, once the virus had run its course. In other words, the army of analysts (of which I am one) saw the pandemic being a temporary hit to the market and our economy just like it was for China.
The proof of this is in the numbers. Witness the graph below that I have referred to numerous times in my previous articles. It's a simple bar chart of the past earnings history for the S&P 500 and future expectations.
The steep drop in earnings this year which ended the 12-year long record bull run was not expected at the beginning of this year. That's why the market was red hot in January and February. At the time, the market was looking for record earnings once again in 2020. But a virus named COVID-19 entered the picture with real force in late February and the market began to immediately sell off as earnings expectations for this year began to take a nosedive.
Expectations for next year also came down considerably, but they never dropped lower than the actual record earnings in 2019. In other words, despite the severe hit to jobs, the economy, and the market, it was all deemed temporary by most of the professional analysts and money managers like me. The consensus amongst us was for record earnings to return in 2021 and even into 2022.
I know what most of you are now thinking to yourself, and I'm sure that it will show up in the comments that I am going to receive from this: How can anyone know what the earnings for the S&P are going to be in 2021 and 2022? Have not most companies withdrawn all guidance going forward?
You can find pro-forma income statements on almost every component of the S&P 500 going out for the next several years. The analysts that follow these respective companies submit these forward-looking estimates to several sources that gather them and create consensus numbers from them. They are being updated constantly.
The companies themselves help to guide the analysts along the way. Notice that when most companies report their actual earnings, they are usually with a penny or two of the actual consensus numbers. In fact, well over 60 percent of companies beat their earnings estimates. This is because they do their best to tamp down the analyst estimate so that they can beat the consensus on the street.
If you think that the analysts on the street are just guessing at what the earnings will be, I have news for you, their jobs are on the line with the guidance that they publish. So, once again:
Rule Number Four
Stocks and the market follow earnings and earnings expectations.
If you don’t believe me, just watch what happens the next time an analyst raises or lowers expectations on a stock that you own.
Now, I want to finish by going back to rule number three that I jumped over, but stated in my last article.
Rule Number Three
The market is forward looking.
There's no better predictor for the economy than the market. You can agree or disagree with me, but it's one of the most important indicators in the index of leading indicators. While the average amateur, individual investor is looking at yesterday, today, and tomorrow, the market is looking anywhere from 3-24 months down the road.
What was the market telling us about the economy back in March/April of this year? It's quite obvious from the one-year chart of the S&P 500 shown below:
The market has been predicting a V-shaped recovery in the U.S. economy. You can agree or disagree with the chart shown above, but it has no agenda or opinion. I did not go out as far on a limb after all, as most thought I did when I pointed this out in my article of five weeks ago.
I said to get ready for a V-shaped recovery in the economy. I think that once again the market has been proven right with Friday’s shocking jobs report. The U.S. economy is now beginning a V-shaped recovery.
Furthermore, when we look down the road to 2022 expectations, we can now justify expectations of the S&P 500 getting to the 3,500-3,700 area. I stated this in my article from last week. I first stated, however, that my next target price for the S&P 500 was 3,200. We hit that number during the day on Friday. Now, we look ahead to the next six to 12 months.
Have another look at the earnings chart that I listed above. What does the chart show for 2021 and 2022? Keep your strategy focused on earnings expectations for those years, because that is what the market is now using as its guide. I publish my estimates every single week in my subscriber newsletter. You have to get the macro right before you start picking individual stocks.
Keep in mind that those earnings expectations are subject to big changes if COVID-19 heats up again or another Black Swan event comes along. You always can put your defense on the field if that happens. I put my defense on the field for about four to six weeks earlier this year, but then I rolled the offense back out from the middle of March until now. It has been a very profitable move.
As for the stocks that I currently like, just check out my articles on them from the last 12 months. Also, check out the alpha that they have produced since I wrote about them. My stock selection process can be found in those articles. It's a combination of value, short-term momentum, long-term performance, and the chart. It's a unique approach that worked well for me over the years.
It's up to you. You can base your market projections on your opinions, your bias, or what your favorite doomsday writers are saying, or you can base them on what the market uses as its guide: earnings and earnings expectations.
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