Let’s take a quick look at revisions within the SP 500.
Hopefully this spreadsheet, which has been updated weekly for years, is helpful to readers.
Note how just within the last week, 412 of the SP 500 companies have seen their estimates changed/tweaked/adjusted by Street analyst’s.
The fact that over 80% of the SP 500 saw estimate revisions this past week was surprising, but the takeaway for readers is that Street consensus is CONSTANTLY changing to reflect competitor disclosure, economic data change, and a host of other variables. (Intel’s raised guidance could have something to do with this – note with the week of June ’14, what Intel’s raised guidance did to the percentages).
Conclusion: what’s unusual about the last 4 weeks data is that normally – within a quiet period of earnings reporting since 499 of the SP 500 have reported their Q2 ’16 results – the negative revisions far outweigh the positive revisions, except for this Q3 ’16, where the last 4 weeks, positive revisions have improved steadily.
Look at the above spreadsheet again and note how positive revisions as a percentage keep ticking higher.
This is an important trend change and it’s been in evidence for a while (and bears repeating), and speaks to what was written prior to this weekend’s post here and here.
So Why the Optimism For the Next 6 Months ?
- The SP 500 is lapping easier comp’s from late 2015: the yuan devaluation in August, 2015, led to a 2-month, sharp correction in August, September, 2015, which then led to a sharp rally starting in early October ’15 lasting until late November ’15, and then the SP 500 saw a 12% decline from late November ’15 through mid-February ’16.
- Commodity returns were at the bottom of the asset-class return table for the last 4 years culminating in the sharp drop in crude and commodity prices in late 2015 (crude oil, gold, silver, copper, grain prices, etc.) which then led to spread-widening in the high yield bond market, which in my opinion is what caused the decline in the SP 500 last December ’15 through mid-February ’16. The Energy and Basic Material’s sector’s high yield debt outstanding is far greater as a percentage of the high yield bond market than the stocks are as a percentage of the SP 500. While Energy and Basic Mat stocks comprise roughly 8% – 9% of the SP 500 by market cap, I suspect that the debt outstanding is probably closer to 15% – 20% of the total junk bond market.
- The point is that even if commodity prices remain stable, there should be year-over-year growth in the next 6 months, for commodities that fell even further after the China devaluation.
- JP Morgan’s Dr. David Kelly made an interesting point this week on one of JP Morgan’s occasional economic calls, where David and his team talk about econ data and it’s implications for the market. Dr. Kelly noted that inflation could be influenced by the year-over-year change in crude oil in Q1 ’17 since crude will be lapping the $28 print it saw in Q1 ’16. Basically for the Energy sector, net income was completely wiped out in Q1 ’16 given the drop in crude oil in late Q4 ’15 and early ’16.
- The typical weak period in terms of SP 500 returns that is typically seen from August 1 through early October every year, never materialized. Per Bespoke, “this is the first year since 2010 where average prices have traded up between Labor Day and 9/22.”
- The cumulative advance / decline (A/D) line made a new bull market high per Bespoke. Here is a chart from Josh Brown’s The Reformed Broker as of mid-August ’16, highlighting same. Market breadth has been consistently positive through the bull market, thus hitting an all-time high this week is a positive.
Where is the Risk ?
The election and the possible ascension of Mr. Trump is the Rumsfeld-ian, “Known Unknown”.
However, In Bespoke’s Weekly Report that comes out every Friday afternoon and remains a wonderful source of great information on the broad asset classes that comprise the investable market, Bespoke notes that “the betting markets are still heavily favoring Clinton by 2 – 1 margin.” Bespoke also noted that Clinton’s lead over Trump today is almost identical to Obama’s lead over Romney at this time in 2012.
Monday night’s first debate could be a pivotal event.
(Please, the above is not a political statement in the least. As an advisor, my job is to assess portfolio risk and market risk for clients, and to try and discern if the US capital markets are more comfortable with one candidate over the other.)
Jeff Miller’s weekly “Weighing the Week Ahead” gives some excellent thoughts on the election cycle. It will be interesting to see how polling results change (if they change at all on Tuesday and next week) and how the market responds, if it does at all.
Thomson Reuters SP 500 earnings Data (by the numbers):
- 499 of the SP 500 have reported their Q2 ’16 results
- Forward 4-quarter estimate: $125.13 versus last week’s $125.54
- P.E ratio: 17.3(x)
- PEG ratio: 8.5(x)
- SP 500 earnings yield: 5.78% down from last week’s 5.87%
- Year-over-year change in forward 4-quarter estimate: +2.03% vs last week’s +2.08%.
Conclusion: Sentiment data – at least AAII (American Association of Individual Investor) data – continues to indicate a lack of real optimism and even downright pessimism towards expected, future, stock returns, which in and of itself, should be good reason to be long or overweight the SP 500 within balanced portfolios. Per AAII directly, bullish sentiment has been below it’s historical long-term average of 38.5% for 79 of 81 weeks.
I’m expecting the next 6 months – from October through early April ’17 to be pretty decent for the SP 500. Technology should be the clear sector winner although it is now overbought.
For readers, be prepared – risk comes on quickly.