The Week On Wall Street: It's All About Earnings
Summary
- Earnings are simply staggering and justify every bit of this rally to new highs.
- Interest rates may now be ready to make a move higher.
- The "primary" trend has pushed markets to new highs and many are now calling for a market "correction".
- Looking for more investing ideas like this one? Get them exclusively at The Savvy Investor. Learn More »
"It is better to be roughly right than precisely wrong." - John Maynard Keynes
It's that time of year again. The old market axiom says that investors should "sell in May and go away," implying that stocks tend to drop during the summer months when traders go away and things slow down. With trading in May about to start next week, investors are pondering whether they should be harvesting their gains now.
Since 1983, average S&P 500 total returns have indeed been much weaker in the six-month May-October period than the November-April window, when they've averaged 8.7% total returns. However, over the long term, average total returns for May-October are still positive at +3.6%; more recently (over the last 20 years) that number has been less at +1.5%.
The S&P 500 did post a profit in May of last year but that could have been a function of how bad stocks cratered in March of 2020. 2019 was a different story. In May of that year, the index fell 6.5% as the bulk of the headlines revolved around a fictitious "trade war". Of course, the 18% rally leading up to that time frame might have also played a role in that decline. It's always a good idea to avoid operating in a vacuum, instead look at where indices have come from to offer a clue as to their next move. As we enter May 2021 the S&P has rallied 11+%, so what could come next might depend on if some decide to ring the register and harvest gains. The bottom line: there is never any clear-cut signal to suggest it is time for stocks to retreat, and we have plenty of proof on that score.
So yes this is truly the time of year to be calling for a "correction". They are out there telling us to get ready for your portfolio to take on some water. Mike Wilson of Morgan Stanley has been making the rounds on TV these days and is looking for a 10% pullback in stocks. Mike is widely followed and respected on Wall Street. He called for a 10% correction in August of 2020, then stated that stocks were overbought and was preparing for a correction last December. He then said he "expected" a correction in January. That was followed up with his "froth" idea, and yes you guessed it, his call for a correction in February.
Of course, we now realize every call has been horribly wrong and it shows the danger when people start running around making cavalier statements that are void of strategy but full of emotion, and what we "think" might happen. Don't get me wrong this isn't intended to "highlight" Mr. Wilson as a poor analyst, he is just part of an army of folks that also like to believe they can somehow make timely market forecasts. The reason I bring this up today is simply that I've noticed the cries for a pullback are getting more abundant and louder by the day. It's an easy call for those that rely on emotion and "what if's" to form a strategy. I'm not ready to join this army just yet.
While the stock market may slow down we have to wonder if that is going to slow the average consumer. A consumer that is just itching to travel, party, dine and generally enjoy the issues that they have been deprived of for over a year. As the weather heats up, consumers are going to emerge from their cocoons and participate in the largest economic recovery we have witnessed in our lifetimes.
The debate then rages on as to whether the stock market has already accounted for this growth and will start to flatten out in anticipation of what comes next. We now have come to realize that this administration has provided plenty of "stimulus" and is looking to add more to the equation. Investors have also seen the potential for tax increases and what appears to be a more anti-business agenda than they have seen for a while.
There is little need to get entrenched in a political debate about what is "good" or "bad" about the new political agenda because that is always decided by an investor's bias. So in my view, the answer as to what may come next for stocks lies in what comes next for corporate profits. The aforementioned consumer demand in our consumer-led economy will be filled with upside surprises. Therefore the preponderance of evidence suggests profits continue to be robust.
However, the scene is not without risks and some risks are growing. Stifle that economy, handcuff corporate growth, allow disincentives for investment to dominate the picture, increase the regulatory environment, and that rosy picture changes.
Only ONE issue dampens this recovery, policy error. Market participants need to start paying attention. Ignore the "words" and pay attention to the "action", because we should all know by now that actions speak louder than words.
The Week On Wall Street
The trading week opened with all eleven S&P sectors in uptrends and at various degrees of being "'overbought" in the short term. The Utility sector has the shallowest uptrend but it has been on a tear lately. Energy is the closest to breaking its uptrend but it would need to trade lower by another few percentage points to do that.
Monday's price action resulted in another new high for both the S&P 500 and the Nasdaq Composite. Tuesday's trading saw the rotation trade take over as Dow transports posted its 23rd new high in 2021. There was little to no downside probing during mid-week trading as any attempt to sell stocks never gained any traction.
The two best performing sectors in 2021 have been Energy (+6.4%) and Financials and those two sectors posted strong gains for the week. So after three days of sideways action where the S&P traded in the narrowest 3-day high-low range since January 2020, the index rallied sharply at the open on Thursday. However, the index reversed sharply lower before a late-day rally wiped out the losses and set the stage for another new high on the S&P 500.
The week ended with a whimper as apparently some decided to sell before May and get a jump on the trade for next week. All of the indices closed flat for the week.
Business News
FOMC left its policy stance unchanged, as universally expected. The Fed left rates near 0% and also maintained the $120 B in monthly QE buying. There were some changes in the second paragraph to growth and inflation, but nothing surprising or meaningful. The statement was a little more upbeat, noting "progress on vaccinations and strong policy support" are helping strengthen economic indicators, including employment.
Added was a statement that "Inflation has risen, largely reflecting transitory factors," taking the place of Inflation continues to run below 2%," acknowledging the run-up in prices. The Fed reiterated "the path of the economy will depend significantly on the course of the virus, including progress on vaccinations." And it repeated that QE purchases will remain at least $120 B per month "until substantial further progress has been made toward" the maximum employment and price stability goals.
The economists participating in the Q&A session after the announcement reminded me of a bunch of kindergarteners raising their hands asking the same question over and over. When is the Fed going to "taper"?
Answer: How about "it depends".
The Wealth Effect. The data doesn't lie. We see how strong consumer balance sheets are. Household net worth is at an all-time high. Add in a higher stock market and higher home prices and the "feel-good" effect takes over inspiring an increase in confidence. That is exactly what is occurring as consumer confidence popped sharply higher to 121.7 in April, much stronger than expected, and it follows the jump to 109.0 in March from 90.4 in February. This is the best level since the 132.6 from February 2020, and it was at 85.7 last April. Nearly all the strength was in the present situation gauge which soared to 139.6 from 110.1. The expectations component inched up to 109.8 from 108.3. We should also note that the fact that more consumers have been vaccinated is another reason for the upbeat report.
Over the past few weeks, initial jobless claims have seen a significant improvement falling to pandemic lows in the 500K range. Even with last week's reading getting revised up by 19K to 566K and this week's print coming in at 553k, the picture of the US labor market broadly remains positive. This week marked the first streak of three sequential weekly declines since November. At 553K, claims are also at the lowest level since the first half of March of last year and are below the peaks of past recessions.
The 6.4% Q1 GDP growth clip beat estimates due to solid service consumption figures that left a 10.7% consumption growth clip, alongside a robust 6.3% pace for government purchases. These big gains were mostly offset by a huge downside inventory surprise, where analysts saw a whopping -$147.5 B Q1 subtraction that left a -85.5 B liquidation rate.
This GDP report revealed Q1 personal income growth of 59.0% for the headline and 67.0% for the disposable income component. The savings rate surged to 21% in Q1 from 13.0% in Q4.
Durable goods orders rebounded 0.5% in March, not as strong as expected, following the 0.9% decline in February and the 3.6% climb in January. A lot of the miss in the forecast was in transportation orders which fell 1.7% after the 2.0% prior slide. Excluding transportation, orders increased 1.6% from -0.3%.
Dallas Fed manufacturing index climbed 8.4 points to 37.3 in April, much stronger than expected. The index had already surged 11.7 points to 28.9 in March and jumped 10.2 points to 17.2 in February. This is the highest reading since the 37.5 print from June 2018. The components were mixed, however. The employment component jumped further to 31.3 after rising to 18.8 in March, with wages and benefits rising to 37.1 from 28.0. Prices paid for raw materials surged to 71.4 from 66.0, as yet another sign of inflation that is buried in these manufacturing reports.
Richmond Fed manufacturing index was steady at 17 in April after rising 3 points to that level in March. It was at -54 one year ago. The components were mixed. The employment gauge dipped to 19 from 22. The wage number rose to 33 from 26. The new order volume index improved to 16 from 10. The price indexes picked up with prices paid rising to 7.11% from 6.15%.
Pending home sales bounced 1.9% to 111.3 in March after the weather impacted -11.5% drop to 109.2 (was 110.3) in February as the polar vortex hit. Home sales have also been limited by low inventories and rising costs. The index was at a historic peak of 130.3 last August. It was at 90.3 a year ago, just before slumping to the all-time low of 70.0 in April. Regionally, three of the four regions rebounded.
Chicago PMI surged 5.8 points to a robust 72.1 in April, much stronger than forecast. That follows the big 6.8 points March jump to 66.3 in March after the weather-related slump to 59.5 in February. This is the best reading since the 75.0 from December 1983 (the record high is 81.0 from November 1973). The 3-month moving average moved out to 66.0 from 63.2.
The Global Report
UK Consumer Spending surprises to the upside. CBI data reporting year-over-year retail sales activity showed an impressive surge for April as the country's most recent lockdown lifted; the indices show the best growth since 2018. That report goes hand in hand with the UK consumer confidence report which was reported at the highest level since the lockdowns.
Earnings
36% of S&P 500 companies reported this week and that will be followed by 27% next week. So by this time next week, we will have enough data to place this component into our strategy.
Bespoke Investment Group:
"At the start of the year, only one strategist had a 2021 S&P 500 earnings estimate greater than $180 per share. There are now seven estimates above that level, with the estimates shifting higher just four months later. There are still three estimates below $165, but we suspect those will be revised higher as well as the earnings season progresses."
Some may think it's too early to look ahead to 2022 earnings but so far the initial data has the forecasted range between $190 and $220. The wildcard, TAXES. From what I've seen most companies are shying away from that discussion today. Stay tuned.
As I have discussed since late last year, EPS estimates were too low and now that is being confirmed. The pace of earnings reports has picked up steam considerably, but the pace of earnings beats has remained strong so far. Nearly 85% of companies reporting have topped EPS forecasts and more than 72% have topped revenue forecasts. The number of companies that are beating on both the top and bottom line, then raising guidance exploded this week. Savvy Investor research starts there and is one reason many gems get discovered during the trading year. Newsflash: it's also why the S&P is trading north of 4,100.
Food For Thought
The Energy Information Agency updated its tracking of national energy use for January this week, and in that report, EIA data also includes updates on CO2 emissions, and the data there is impressive. In addition to the long-term decline in CO2 emissions per unit of GDP, per capita, CO2 emissions have crashed since the mid-2000s
Source: Bespoke
As mentioned last week:
"The stock market is going to have to digest the massive spending in the administration's 'climate initiatives'. A program that bears a huge cost with plenty of evidence telling us there is little to no benefit. Devoting trillions to achieve what is now arguably a trivial benefit that is dependent on "total" global commitment is without a doubt a long shot."
No need to get into a debate. The new buzzwords "existential threat" are making the rounds these days but the picture here in the U.S. is crystal clear. Carbon emissions in the U.S. could go to zero (an impossibility) and the global picture doesn't change. Unless this initiative truly produces the "jobs" that are promised, and the growth that is envisioned actually starts to occur, the stock market could potentially re-rate the entire "green energy" sector. On the "jobs" front, it appears we aren't starting on a positive note.
The "cost" of this initiative will also come into question, and possibly re-rate the entire "green energy" initiative.
The Biden administration unveiled a large family support plan today that includes free pre-K and community college, an extended Child Tax Credit, permanent earned income tax credit expansion, direct child care subsidies, and a national paid family leave program coupled with tax hikes for the highest income bracket, shifts in capital gains taxes at the high end of the income spectrum, and stepped-up IRS enforcement funding for tax collection and auditing expected to generate large gains in receipts.
If it wasn't clear what path the administration is on, the latest headlines out of D.C. make it abundantly clear. It appears 89 billion will be allocated to the IRS regulatory scene and 28 billion to struggling restaurants that were forced to close. The priorities have been set. This isn't a big deal for the stock market today. What happens down the road is contingent on the continuation of the policies that D.C. has embarked on. Stay tuned.
The Daily chart of the S&P 500 (SPY)
New stock market highs are once again part of the narrative this week. The S&P 500 and the Dow Transports were the two indices that set those records.
A mixed bag across the indices for the week with all of the major indices showing a weekly loss except the S&P 500. The "Sell in May" crowd decided to get a head start on next week's trading. The "look" of the DAILY chart for the S&P hasn't changed that much in the last month.
"Fading" an uptrend is not my preferred strategy yet that is what I am now hearing from many analysts. Ironic how the "hedgers" have left the scene here. Perhaps they are starting to heed the advice about making bets against a trend, or they simply ran out of money. When we step back and look at the chart since November 2020, those that decided not to follow the "trend" find themselves in serious financial trouble.
Investment Ideas
My Playbook Is Full Of Opportunities For 2021.
April is in the books and the S&P 500 posted its third monthly gain in a row with the index rising 5% for the month. That makes it 5 out of the last 6 months with gains that have totaled 28%. We're just four months into the year, and while the S&P 500 is already up by double-digit percentages YTD (+11%), it's actually not all that uncommon to see double-digit percentage gains in the first four months of the year. Throughout the S&P's history, nearly one in four years have seen a YTD gain of more than 10% through the end of April. You may be surprised as to what typically comes next.
It wasn't too long ago many market analysts were trumpeting the weakness of the Nasdaq composite noting how it was underperforming the other major indices. There was a reason for that, it had been an Outperformer for a period of more than 2 years. The "Worry Warts" can close that chapter of their storybooks as the NASDAQ quite stealthily rallied back to post its first high since February. The problem with most investors is that they are impatient, they refuse to step back and let the situation play out. Jumping to conclusions, failure to recognize, and MORE importantly follow a simple fact like the "primary trend" is a recipe for failure.
Here is a very simple explanation for those that are always looking for a reason to be worried. The majority that often gets consumed from listening to all of the market "noise" needs to remember what has been stated here for years.
The single most important metric in looking at the market is the "primary trend." The primary trend can either be a bullish (rising) market or a bearish (falling) market. If the stock market is making successive higher-highs and higher-lows the primary trend is said to be up; and, the primary trend continues to be "up" despite pullbacks, drawdowns, and corrections.
Now if someone wants to take that as a "Perma Bull" stance go right ahead. Based on all of the metrics I use, there was NEVER a time to abandon the primary trend and that included 2020. Periods of time to be cautious and patient, yes, abandon the trend in place, NO. I'm never going to tell anyone to get bearish because we could see this or that occur when the primary trend is Bullish. That is foolish, and borders on irresponsibility. So, you will NEVER hear me tell anyone to go against the primary trend. That advice has served members of my marketplace service well. The positive results are well documented.
Going back to the "correction" talk, I can envision a period after the earnings season is over that could result in market weakness. A VOID is usually created after investors have heard the headlines on the corporate fundamentals and then wait for news of what might come next. Add that sentiment and the consistent talk of weak seasonality to an overbought market and there might be a dip to support levels.
This past week I noted two interesting technical levels that were tested in the charts of interest rates and the U.S. dollar. They turned out to be opportunistic discoveries. The consolidation of 10-year rates since the end of Q1 has created a classic bull flag formation (higher prices ahead) with 10-year yields appearing to break out after a 50-day moving average test over the last few sessions. If you don't use technical analysis in your strategy, there is no need to continue reading and I wish you the best of luck. Then do yourself a favor, please "Google" investment advice, and pursue all leads.
Technicians would generally consider this a bullish set-up, implying higher yields ahead (and lower bond prices). The U.S. dollar also tested support over the last couple of sessions, with the broad dollar testing the support line which has been carved out by the last two lows over the past few months.
Both of these charts represent a "potential" speedbump for the markets. Investors will typically sell technology as interest rates rise. It will take a whole for some to figure out rates are rising for the "right " reason. If rates start to rise and the dollar strengthens, traders may be inclined to change their equity allocations. Simply speaking it could be a reason for some profit-taking to seep in as the market remains in overbought territory.
Energy stocks have rebounded strongly lately and a 4.2% gain in the Energy ETF (XLE) this week, while the indices were flat, moved the ETF back above all short-term resistance. If this holds (I expect it will) all of my concerns over any short-term weakness in the group are put on hold. It's time to take a look at energy again. My two favorite "explorers" were up 4.7% and 6.5% respectively.
Don't overlook the large-cap dividend payers Exxon (XOM) and Chevron (CVX). Both have bounced off of support and appear ready to attack their old highs.
As interest rates rose, The Financials set a new high with the Financial ETF (XLF) gaining 2.8% this week. If the break in the downtrend I mentioned in the 10-year Treasury is indeed real, Financials should continue to perform.
FAANG
Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOG) (GOOGL).
A group of stocks that so many decided would underperform indefinitely when the value trade took over. Newsflash, these giants are VALUE. And they are GROWTH. An investor and holder of these stocks couldn't ask for a better earnings season. The magnitude of the increases in revenue and EPS is staggering given the size of these companies. Apple is a $2 Trillion company and posted double-digit growth in every category. Year over year revenue was up 53%. These results are what is typical for a startup small-cap growth company, not a mega-cap.
Every one of these companies is a CORE GROWTH holding suitable for any portfolio. Don't be concerned about the "N". Netflix held the support level we discussed after they reported earnings and it is time to accumulate. Full disclosure, I own all of the above.
An earnings bonanza that lifted many "Savvy stocks" to breakouts and new all-time highs. Shopify (SHOP) (+7.5%) and United Parcel (UPS) (+14%) posted oversized gains for the week. Both charts now show impressive spikes in price. The party is just getting started, and there are many more that fit this category in my arsenal.
This slate of earnings we just witnessed is staggering and does a lot to justify the rally equities have staged since November of last year. These phenomenal reports are the results of a positive pro-business backdrop that is still in place today. I'm not running away from these earnings nor the companies that are beating estimates handily and raising EPS guidance. However, it will be incumbent on market participants to reassess, monitor, and adjust IF and when any "change " appears to be in the cards.
Whether the market gives us the correction we are looking for or not, the gains have been enormous, and that has been accomplished by following the primary trend. The short-term focus will soon shift to the "interest rate" and the "political agenda" backdrop. It is time to pay attention.
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client's personal situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
THANKS to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
Source for all images: Pixabay
The stock market is at new highs, and the consensus view calls for a "correction".
It's no secret, there are risks being presented to investors now.
On the fundamental side, the "seeds of change" are planted."
How and when these potential changes impact the investing landscape is the key to any strategy now. This is no time to be wandering around without a plan.
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This article was written by
Fear & Greed Trader is an independent financial adviser and professional investor with 35 years of experience in all market conditions. His strategies focus on achieving positive returns and preserving capital during bear and bull markets and he has a documented track record of calling the equity market correctly for the 10+ years.
He is the leader of the investing group The Savvy Investor where he focuses on sharing advice to help investors avoid the pitfalls that wreak havoc on a portfolio during bear markets. Features of the group include: Macro updates 7 days a week, ETF selections, covered call writing strategies, and live chat 24/7. Learn More.
Analyst’s Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. 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.
Any claims made regarding specific Stocks/ ETF’s and performance contained in this report are fully documented in the Savvy Investor Service.
My Playbook is positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY-AND-HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can't expect to capture each and every short-term move.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (118)
I am finally home after 3 months in the hospital. Life is wonderful when Uncle Sam pays young, energetic ladies wait on you. Beats investing.
Best
T
R
Chug Chugging along and very close to the 20 day moving average; which looks to me to mean a pause for a bit or a quiet May and summer.... I am staying invested and cautious with quality and it seems to work just fine. My portfolio is up in value and still paying the dividends,and some being raised; loving it all !
Happy Investing :)) Rose