3 Observations on Q4 and Thinking Forward

Thursday, January 18, 2018 |

  1. Earnings are getting a lot better.  We look at the rate of change of forward estimates and the trend is firmly up.  Additionally, forward revisions in Q4 (small sample size) are the best that have been recorded since 2011.  Thus, the rally over the last year has been backed by fundamentals.  Additionally, as long as this earnings trend remains in place the market is likely to power higher.  See chart at top of this post.  Source: Earnings Scout.
     
  2. Global economic growth has been strong across the board.  This helps validate the performance of international stocks, which was very strong in 2017.  The chart below shows a lot of green (over 50 indicates expansion) and that economic strength is consistent and not just limited to the US.
    Source: Markit, JP Morgan Asset Management.  Heatmap colors are based on PMI relative to 50 level, which indicates acceleration or deceleration of the sector for the time period show.
     
  3. How much gas is left in the tank?  Ultimately how much longer the recovery lasts is still an unknown.  While economic data indicates we are still in an expansion, some data points are consistent with an expansion closer to the end: yield curve (flattening), credit spreads bottoming, strong PMI increases.

    Source: DoubleLine
     


    International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and political uncertainties, not typically present with domestic investments.

    S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market.

    Barclays U.S. Aggregate Bond Index is a composite of four major sub-indexes: US Government Index, US Credit Index, US Mortgage-Backed Securities Index, and US Asset-Based Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.

    The bond market is volatile and carries interest rate, inflation, liquidity and call risks. As interest rates rise, bond prices usually fall, and vice versa. Change in credit quality of the issuer may lead to default or lower security prices. Any bond sold or redeemed prior to maturity may be subject to loss.

    A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings and risk, calculated by deducting the yield of one instrument from another.  The above chart shows the difference between the 10 Year and 2 Year Treasury.

    Investors cannot invest directly in an index. Past performance is no guarantee of future results.

SEE IMPORTANT DISCLOSURES IN LINK