Ain't no sunshine when she's gone.

April 4, 2016

Ain't no sunshine when she's gone
It's not warm when she's away
Ain't no sunshine when she's gone
And she's always gone too long
Anytime she goes away
Wonder this time where she's gone
Wonder if she's gone to stay
Ain't no sunshine when she's gone
And this house just ain't no home
Anytime she goes away
-Bill Withers, Ain't No Sunshine
. . .
Stocks have dithered in a tight trading range since November 2014. As indecisive as a squirrel in a nut factory.
Some analysts point to burgeoning economic data as fodder for stocks' inevitable rise. Others tout dreary trend lines as reason to decline. While fear mongers cite troubles abroad. Exclaiming how they will spill over the gunwales and sink the economy.
The puppet master directing the markets year-and-a-half lateral trend line? Not some Middle Eastern despot. Nor is Europe's ongoing goat rodeo to blame. Not even can the big hot mess posing as this nation's capital get credit.
The market's missing ingredient? The one denying recent and near-term equity appreciation? Earnings growth. Cause there ain't no sunshine when she's gone. And this house just ain't no home. Anytime she goes away...
And while some quarters contend that earnings growth will soon return, we caution patience.
Here's why.
Q1 S&P 500 earnings forecasts call for an 8.5 percent year-over-year slump. So sealing the index's first streak of four-quarterly declines since the Credit Crisis. And with most analysts supposing earnings increases will avail themselves in the second half of 2016, investors should count their blessings. For the last 18 months could have been worse.
While the S&P 500 has posted a menial gain on the year, it's done so upon a gloomy landscape. One littered with sluggish economic growth, tenuous central bank policies, terrorist attacks, Middle Eastern unrest, and a European migration crisis that appears existential in scope.
Were it not for the resilience of U.S. investors, this market might more resemble the now infamous scene in The Revenant, in which Leo DiCaprio's character gets mauled by an angry grizzly. As opposed to the more apt analogy of Mad Max, in which a bunch of mechanically inclined nomads feverishly meander across a desert landscape, hitting lip-splitting speeds while getting nowhere fast.
Further tipping near-term scales against us would be the slightly more-expensive-than-usual posture stocks have copped. As trailing price-to-earnings ratios sit at 18.2 compared to the 10-year historical average of 15.8. This should be expected following seven years of share appreciation. But worsening matters has been the interminable march of earnings declines this last year. Taking tipsy valuations and exposing them to more precipitous declines should the right headline strike fear into investors' hearts.
So what's driving this earnings-growth vacuum? Plenty.
A strengthening dollar has hindered the overseas profits of U.S. multinationals. Falling oil profits have killed an entire segment of the U.S. economy. One that had been a principal growth proponent just two years ago. And weak consumer spending -- a combination of missing wage growth and increased household savings rates.
Another proverbial hole in the dyke looms large till December. As markets detest uncertainty. And nothing emanates uncertainty like a presidential election. Especially one as contentious as this. Toss in the ill will over the dark machinations in the eurozone and Middle East? You begin to wonder how Jim Cramer gets out of bed in the morning.
It all starts to resemble a laundry list from hell. Allowing one to quickly discern why earnings have been stagnant.
Let's not, however, curl up in the fetal position just yet. For all of the peak-to-trough gyrations of the last year, blessedly, markets have been largely flat.
Moreover, there have been rays of sunshine poking through the ventilation shaft of the earnings prison in which we're trapped.
Utilities. Telecoms. Steady Eddies they are. They've managed to toe the line and attract capital. Sending shares higher. And gold, which requires no earnings to rise, was up over 16 percent in Q1. Aiding the prospective earnings growth of gold miners the world over. Certain investment outfits that benefit by betting against corporate earnings growth -- think hedge funds and managed futures -- have done very well as markets have toiled.
When, do tell, might earnings growth return and buoy portfolios and spirits?
Wall Street analysts feel that earnings will get traction in the year's second half. Largely on the wings of favorable year over year comparisons, as commodity-sensitive companies like those in oil and agriculture see better conditions and a rebound in fortunes. Not to mention the idea that, at some point, Europe has got to slough off its multi-year malaise and get back in the game. C'est pas trop tôt!
Digesting that, one appreciates the fortitude of these markets. Fighting to stay afloat amid a strengthening dollar, an election, geopolitical turmoil, corporate vicissitudes, terrorism and a complete lack of economic vision in D.C.
And though we must remain patient, help could be on the way.
FactSet polled a number of analysts, revealing a consensus that puts Q3 earnings growth up 3.8 percent year over year. Which would represent the first sign of quarterly growth since Q1 2015. Equally enticing was the analysts' opinion that revenue, long lacking though it's been, will advance by 1.9 percent in Q3. The first such increase since 2014. Following, Q4 will likely bring an acceleration in profits and revenues. Perhaps catalyzed by the culmination of the election. And the dissipation of the angst and uncertainty wrought by such political circus. With analysts forecasting an 11 percent increase in Q4 earnings and a 4.3 percent increase in Q4 revenue.
Makes sense. The election ends. A new administration moves into The White House. And investors and economic spectators around the world use that, as well as an uptick in earnings growth, to incite a relief rally. A rising tide that lifts all boats.
When earnings growth returns, so shall markets rise. Till then, you might say that Bill Clinton's immortal line still resonates some twenty years later. Because it's still the economy, stupid. After seven years of rising markets, there's simply no more blood to squeeze from the turnip. No more costs to cut. Margins to expand. Efficiencies to leverage.
Such is the current mindset, as well. As revealed by a recent Gallup economic poll showing that 29 percent of Gallup respondents rate current conditions as "poor" and 58 percent think things are getting worse.
So long as the nation remains in this protracted two percent GDP growth malaise? There will be no earnings growth. The private sector has done everything possible in a zero growth environment. With no rabbits left to pull, it comes down to real earnings growth. And earning growth will only accompany economic growth. No more tricks, stimulus, QE, ZIRP, NIRP or lucky rabbits feet. After eight years of little-to-no growth, I don't think we're asking for too much.
Meantime? We'll likely see continuing success in asset classes that navigated Q1's volatility. Gold. Gold miners. Utilities. Telecom. Silver. Telecommunication. Transports. And staples. All won big the last three months. And should weather any storms that occur on the road to November's three ring circus.
And as the father of the circus, P.T. Barnum himself, once said, "Clowns are the pegs on which the circus is hung."
Why would this be any different?
At the very least we've something to which we can look forward. A ray of sunshine. For the election's arrival may mark the return of earnings and economic growth. Till then, lower expectations, relax and enjoy the show.

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