It's About Expectations Versus Reality
One of the first headlines on CNBC.com after Monday's closing bell read: Stocks gain 300 points, but why?
The article implied that markets can't seem to decide whether rising rates are good or bad. The author opined that just a couple months ago, stocks would have quaked at the idea of rates rising because the increasing costs of servicing debt would likely choke growth. But now stocks are rallying at the same rates are rising. The obvious question in the article was, what gives?
From my seat, the answer is simple - the author is focusing on the wrong thing.
First and foremost, it is important to understand that the drivers of stock prices are constantly shifting. And the key here is that growth is the focal point right now, not rates. In short, the environment has changed. The drivers have changed. And thus, the action has changed too.
Looking at the bad 'ol days of December, the fear was that rising rates (aka the Fed going too go far with their tightening campaign) would wind up killing economic growth. And the Fed's track record on this issue certainly reinforced the fear!
But now that Mr. Powell & Co. have done a complete about face and the Fed has recognized that growth is slowing, the game has changed. The game isn't about the fear of rates rising. Now it's about growth expectations.
The overarching theme here is pretty straight forward. Everybody knows that growth is slowing around the globe. As such, analysts have been busy hacking away at earnings estimates. For example, from the high seen last fall, EPS estimates for 2019 operating earnings on the S&P have come down from nearly 15% to 9%.
Thus, it is safe to assume that a fair degree of #GrowthSlowing has already been baked into the cake. This is why stocks have ignored all the recent data showing that growth is heading the wrong direction. Remember, in the stock market game, something everyone knows simply isn't worth knowing!
Currently, the game is about gauging the future. And as I opined yesterday, investors appear to be looking at the future's glass as at least half full.
You see, everyone expects a trade deal with the Chinese to get done. And once the undoubtedly "tremendous" deal is implemented, growth is expected to resume. Heck, some folks even argue that there is now pent up demand due to the uncertainty created by the US/China trade spat. Therefore, the Bulls contend that global growth is likely to be kick-started in the near future.
Since stocks look ahead as opposed to back, our heroes in horns opine that there is surely more upside ahead. Don't forget that stocks have effectively gone nowhere since the end of 2017. So, with earnings having improved over the past 15 months and economic growth about to resume around the globe, the operative words used among fund managers appears to be, "Buy the dips - any dips!"
Now fast-forward to April 1, 2019. In the wee hours yesterday, we learned that China's manufacturing data came in well above expectations.
Wait, what? News that is better than expected out of China? News suggesting that the Chinese economy might be turning even before the trade deal gets done? Interesting!
For the bullishly inclined, this is the type of news that causes analysts to re-evaluate their expectations.
This is the type of news that causes the bears to wonder if they've got it wrong.
And this is the type of news that causes orders to be given. As in, "buy 'em!"
The question, of course, is if yesterday's good news was a one-off or the start of a trend. Make no mistake about it; this is question that is likely to frame the action going forward.
My take is if the data starts to come in even a little better than expected, investors will keep looking on the bright side. And if it turns out that reality doesn't deliver the goods, then stocks will struggle.
But the bottom line is that the game is now all about expectations for growth versus the reality of what actually transpires.
Thought For The Day:
Be who you are and say what you feel, because those who mind don't matter and those who matter don't mind. - Dr. Seuss
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
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