Bull Market Ending?

Bull Market Ending?

4th Quarter 2018 Review

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The stock market continues to be volatile due to increased interest rates, the Fed’s “Quantitative Tightening”, an over-valued stock market, geopolitical concerns, global economic concerns and domestic economic concerns coupled with economic optimism.

Interest Rates

Treasury interest rates have risen to 3.0% recently. The question is, will rates continue to rise, will they back off, or will they stay in a trading range between 2.8% – 3.0%? The general consensus is they will rise slightly to about 3.3% – 3.5%, then stabilize. Hoisington Investment Management thinks rates could rise a little more, but as the economy slows rates will head lower. They say that central bank policy has turned highly restrictive. This will put the economy’s growth at risk over the short run, while sizable increases in federal debt will serve to diminish, not enhance, economic growth over the long run. As the Fed raises short-term rates and lets its balance sheet of bonds roll off, the yield curve should flatten. When the Fed sustains the tightening process long enough, the inflation rate will decrease as incomes fall and ultimately result in lower rates. It is expected that the Fed will raise rates 3-4 times in 2018. Next year (2019) should be the year to worry about if the Fed continues its restrictive monetary policy. Wall Street expects a recession in late 2019-2021.

Stock Market

At the end of 2017, the trailing 12-month Price/Earnings Ratio (P/E Ratio) of the S&P 500 stood at 25.39x. The forward estimate for 2018 was 18.2x at December 31, 2017 (above the 10-year average of 14.3x). The stock market moved higher in January 2018 lead by stocks like Facebook, Amazon, Apple, Netflix and Google (the “FANGs”). The market indexes were pushed higher due to momentum rather than fundamentals. The market rose due to P/E Ratio expansion in the expectation that the tax law change would result in higher earnings for S&P 500 companies. As this perfect scenario played out the S&P 500 became more overpriced.

Then in early February 2018, an increase in wages of 2.9% in January spooked the market and it retreated. Next, the Trump administration announced tariffs on countries where we have a trade deficit. This along with the geopolitical threats from North Korea and Russia caused the retreat. All this time the market expected and still expects corporate earnings to rise. Wall Street currently expects the P/E Ratio for the S&P 500 to end 2018 at 16.1x. The problem is that we have to wait for the earnings to come through over the rest of the year. We expect volatility to continue throughout the year. If inflation picks up it could slow the growth in earnings. This bears watching.

We recently attended the PIMCO Investors Conference in Newport Beach, California. There were 370 attendees representing large public funds, corporations and foreign nations. The speakers were Ben Bernanke, Jean-Claude Trichet (former head of the European Central Bank during the debt crisis), Gordon Brown (former Prime Minister of Great Britain), Bill Clinton, and George Bush to name a few. PIMCO’s current opinion on interest rates is similar to Hoisington. It does not think rates will keep rising and it thinks the Fed will flatten the yield curve, but cautiously. It believes that inflation will not rise enough to slow the economy. The two-day conference was very informative.

The following information is from the FACTSET “Earnings Insight March 29, 2018”:

Overall, the earnings growth rate for Q1 2018 of 17.3% today is above the estimated earnings growth rate of 11.4% at the start of the quarter (December 31). Ten sectors have recorded an increase in expected earnings growth since the beginning of the quarter due to upward revisions to earnings estimates and upside earnings surprises, led by the Energy, Telecom Services, and Financials sectors. On the other hand, the Real Estate sector is the only sector that has recorded a decrease in expected earnings (FFO) growth since the start of the quarter due to downward revisions to earnings (FFO) estimates.

Earnings Guidance: Record-High Number of Companies Issuing Positive EPS Guidance

The term “guidance” (or “preannouncement”) is defined as a projection or estimate for EPS provided by a company in advance of the company reporting actual results. Guidance is classified as negative if the estimate (or mid-point of a range estimates) provided by a company is lower than the mean EPS estimate the day before the guidance was issued. Guidance is classified as positive if the estimate (or mid-point of a range of estimates) provided by the company is higher than the mean EPS estimate the day before the guidance was issued.

At this point in time, 105 companies in the index have issued EPS guidance for Q1 2018. Of these 105 companies, 52 have issued negative EPS guidance and 53 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 50% (52 out of 105), which is well below the 5-year average of 74%.

If 53 is the final number of companies issuing positive EPS guidance for the first quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking EPS guidance in Q2 2006.

Double-Digit Earnings Growth Expected to Continue in 2018

For the first quarter, analysts are expecting companies to report earnings growth of 17.3% and revenue growth of 7.3%. Analysts currently expect earnings to grow at double-digit levels for the remainder of 2018.

For Q2 2018, analysts are projecting earnings growth of 19.1% and revenue growth of 7.7%.

For Q3 2018, analysts are projecting earnings growth of 20.9% and revenue growth of 6.4%.

For Q4 2018, analysts are projecting earnings growth of 17.1% and revenue growth of 5.6%.

For all of 2018, analysts are projecting earnings growth of 18.5% and revenue growth of 6.7%.

Valuation: Forward P/E Ratio is 16.1, above the 10-Year Average (14.3)

The forward 12-month P/E ratio is 16.1. This P/E ratio is equal to the 5-year average of 16.1, but above the 10-year average of 14.3. However, it is below the forward 12-month P/E ratio of 18.2 recorded at the start of the first quarter (December 31). Since the start of the first quarter, the price of the index has decreased by 2.6%, while the forward 12-month EPS estimate has increased by 9.9%.


If interest rates stabilize and earnings for the S&P 500 companies materialize, the markets should remain stable throughout 2018. We will keep a close watch on inflation, the Fed, corporate earnings and geopolitical events. It should be an interesting year.

Jamison Monroe
Chairman & CEO
Director of Consulting

Released: May 02nd, 2018 04:00 PM

Quarter Original Earnings Estimate Current Revenue Estimate Original Revenue Growth Current Revenue Growth
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
FY 2019

Market Bubble Bursting?

The money manager GMO (Grantham, Mayo and Otterloo) has issued a white paper entitled “Is the U.S. Stock Market Bubble Bursting?  A New Model Suggests ‘Yes’” that describes the potential for the bursting of the stock market bubble they say has developed.  The Key Points listed in the white paper:

  • A new model suggests that from early 2017 through much of 2018, the U.S. stock market was a bubble.
  • Driven by negative changes in sentiment, the bubble started to deflate in the fourth quarter of 2018, in spite of strong fundamentals.
  • Our advice, consistent with our portfolio positions established in Q1 2018 – as usual, we were early – is to own as little U.S. equity as your career risk allows.

We have attached the white paper for your reading pleasure.


As a result of all of the above information, Monroe Vos recommended in the fourth quarter that our clients reduce their equity exposure to 40% of their portfolio.  By moving 20% of the portfolio from stocks to bonds, we were not timing the market but reducing our clients’ risk (volatility) in their portfolio.  We have done this on two other occasions.  First was in 2000, prior to the bursting of the “Tech Bubble”, and second in 2008 during the “Financial Crisis”.  We also reduced stocks a second time in 2008 to 25% of the portfolio.  We are concerned about the still overvalued stock market, the slowing global economy and its effect on corporate earnings, the Fed’s ability to jump start the economy if what Hoisington says is correct, and the effects of negative sentiment on the stock market should GMO be right.  We consider an allocation of 40% stocks and 60% bonds/alternatives to be a neutral allocation.

We look forward to discussing all of these points with you at our next meeting.

Jamison Monroe
Chairman & CEO
Director of Consulting

Released: January 24th, 2019 04:30 PM

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