Monthly Outlook: May 2019
You hear it everywhere – “Everything is Awesome!” GDP is up over 3%, earnings are up, employment is up. Stocks, bonds, gold, dollar, home prices – all up! Awesome! It’s a chicken in every pot! What could go wrong? We’ll get to that. But first, let’s review April. U.S. stocks continued their 2019 rally with the Russell 3000 gaining another 3.9%. The strongest sectors are Technology and Utilities, an odd combination. Weakness is seen in Energy, Financials, and Healthcare. International stocks gained 2.7% with Europe and Emerging Markets doing better than Asia. Bonds marked time in April with flat results, down 0.1% for the month. Blending the markets for common allocations, the iFolios 75 benchmark was up 2.3% and the iFolios 85 benchmark was up 2.7%. We matched or slightly beat the benchmarks in May. So yeah, everything does seem awesome! We should also point out here that nearly every market that we follow is in an up-trend as we define it (rising and above its 200-day moving average). That’s our signal to remain fully invested and 100% positioned for growth. We’re doing that and have minimal cash balances in portfolios. What makes iFolios special is our equal focus on growth and protection. We’re enjoying awesome uptrends, but we’ll stay vigilant for trend changes.
What’s Beneath the Headlines?
There’s always more to any story than the headlines suggest. This time of year is known as “earnings season” as corporations report their quarterly earnings. Analysts seem to make a game of it, with bragging rights going to the analysts that guess closest to the actual results. On the other hand, companies try to steer the analysts and their guesses downward, so they can beat the forecast. Today, with about 80% of the S&P 500 companies reporting, the headline says “84% of companies beat estimates!” That sounds awesome! Clearly, the companies successfully convinced the analysts to lower their earnings expectations just enough so that 84% of them could beat them. But how good are earnings? If one bothers to look at the hard data provided by Standard & Poor’s (us.spindices.com) we can see that 1stquarter earnings for the S&P500 were $33.74/share compared to $33.02/share for the 1stquarter last year. So, earnings are only up 2.1% year over year. That’s growth, but slow growth. That’s good, not awesome. Looking deeper, we can see that analysts are predicting more slow growth for the 2ndand 3rdquarter which is reasonable. But for some reason, they’re predicting the 4thquarter of 2019 will be 39% higher than the 4thquarter of 2018. Miraculous! For all of 2019, analysts expect earnings to be 13% higher than 2018, yet we’re starting off the 1stquarter with just 2.1% growth. Something tells me that those company executives will lean on those analysts soon to lower their estimates! Similar kinds of sub-headlines data can be seen in other reports. As a quick example, the headline report on 1stquarter GDP was that the economy is booming at 3.2%. That truly is a strong number. But 1.7% of the 3.2% was due to temporary gains from exports and build up of inventories ahead of any trade wars. The employment report headline was strong stating that unemployment is down to decades-low 3.6%. Wow! But so is the labor participation rate, with only 60.6% of the U.S. population even counting as in the workforce. You get the point – there’s always more to the story than we read in the headline.
Valuations Remain Sky-High
Matching the headlines, stock market valuations are priced for awesome. We watch the most correlated metrics including Market Cap to GDP, P/E10, and NYSE Margin Debt. All remain at peak levels, about 2 standard deviations above average. We should remember markets can remain over-valued for months and even years so there’s no need to panic. But there are still a lot of unknowns in the world including how Brexit is resolved, whether there will be any China trade deal to re-engage global trade, and how politics unfold in the U.S. and other key elections around the world. Clearly, most economic data is good and markets are probably justified to be in rising up-trends. But maybe it’s prudent to temper our enthusiasm and at least be open to the idea that we could see some volatility as investors read beneath the headlines. 2019 is definitely starting off as a good year and we’re making money. If it’s not awesome, it’s at least good!