Yin and yang. All things serving as inseparable and contradictory opposites. Preserving the greater balance of the universe and symmetry in all things. Male and female. Dark and light. Old and Young. Q4 2018 and Q1 2019.
The last six months have represented an extraordinary cycle. A really bad quarter (Q4 ) followed by a really good quarter (Q1). Three other similar cycles have occurred since the financial crisis ended in 2009. In each case, the following quarter was also positive and better than average.
Especially positive given that the S&P 500 sits a mere one percent below last year's all-time high.
Earnings season truly kicked off last week. JP Morgan, PNC, and Wells Fargo reported Friday. Citi and Goldman reported Monday. With the pace picking up this week. A slew of positive reports from the likes of UnitedHealth Group, BlackRock and Bank of America, among others, has elevated stock prices.
How have stocks performed thus far in reaction to their earnings reports? Bespoke Investment Group reveals that since the middle of March, 67 companies in the S&P 1500 have reported. Of those, 72 percent have exceeded EPS forecasts. While only half of that amount have exceeded revenue estimates. In terms of guidance, just seven companies have raised forecasts while 11 have cut forward estimates.
Regarding performance? Things have been good. Bespoke reports that while the average gap up following earnings has been just 0.04 percent, stocks are averaging a gain of 1.02 percent from open to close. For companies that have exceeded EPS forecasts, the average gap higher is 2.1 percent, followed by an open to close gain of 1.03 percent. Stocks that have missed EPS forecasts, however, have been taken to the woodshed. Gapping down an average of over six percent and then rebounding somewhat with an average open-to-close rally of 0.88 percent.
Even with the equity market off to its best start since 1987 and its fifth best start ever, analysts still aren't feeling it. Over the last month, analysts have raised EPS forecasts for 341 companies in the S&P 1500. While lowering forecasts for 614. A net of -273, or 18 percent of the index.
And yet, from the most pungent manure spring the loveliest flowers.
When the earnings season expectations bar is low, the S&P 500 typically incurs a positive performance. Conversely, when the bar is high, the market has struggled. Which sounds like every other facet of life. Beware the unbearable weight of high expectations.
At present, the bar is low. Since the start of 2009, there have been nine prior periods where the revisions spread was more negative than it is now. And in those periods the S&P 500 averaged a 3.8 percent gain during earnings season with positive returns eight times. The only down period was Q4 2015. And even then the S&P 500 fell only 0.22 percent.
Much of the continuing rally has been supported by bets that economic growth will be strong enough to support corporate profits, but modest enough to keep the Federal Reserve from raising interest rates. Essentially, the Goldilocks scenario. Not too hot. Not too cold. Just right.
While global economic uncertainty remains high, JP Morgan CEO Jamie Dimon recently expressed confidence in the U.S. economy. And last Friday's upside surprise for JPM's Q1 earnings underscores that investors concur.
"If you look at the American economy," Dimon said, "the consumer is in good shape, balance sheets are in good shape, people are going back into the workforce, companies have plenty of capital... It could go on for years... There's no law that says it has to stop... There may be a confluence of events that somehow causes a recession, but it may not be 2019, 2020, 2021."
In the old country, European stocks remain under pressure. But have shown positive signs. European indices have traced interesting technical patterns. Even amid all the caterwauling over Brexit, and the alleged European apocalypse Brexit may incite. The French index, which trades at the same level it did in mid-2014, has paced the S&P 500 of late. A move that stands out like a bikini in a seminary.
Could the ultimate irony of the entire Brexit debacle end up in the formulation of a synchronized global stock recovery occurring at the same time as a synchronized global growth slowdown? Could the much-anticipated post-Brexit apocalypse be more like the Loch Ness Monster? Much discussed though never seen?
The International Monetary Fund cut its worldwide economic growth forecasts for 2019 to 3.3 percent. Down from 3.5 percent in January. Attributing its decision partly to "trade tensions and tariff hikes between the United States and China." As well as a decline in business confidence and a tightening of financial conditions.
American data has softened in some areas. While remaining firm in others.
The newest data from the NFIB small business optimism index shows an ebbing of confidence that is prompting firms to cut back their investment plans. While unemployment held steady at 3.8 percent last month. Just above the 49-year low of 3.7 percent touched last fall.
Elsewhere, we urge investors to ignore the media wailing about political interference in U.S. policy making. Because markets don't care. Politics has always played a role. What is unique this time is America has a President with a blatant pro-growth agenda (some would say too pro-growth). Who has little patience for counterarguments like, "The country exists in the 'New Normal' and can no longer grow at more than two percent annually." Accordingly, the economy has responded. Like a canine might to a more dedicated, loving trainer.
We've long contended that in the U.S., more than most nations, the economy serves as a tidal current. One that is capable of lifting or sinking all ships. The last two years have featured a greatly improved economy that has lifted all ships. If Republicans and Democrats weren't always trying to convince us of the other sides' nefarious intentions, the national ethos would likely be quite positive.
So where do things proceed from here?
We've mentioned in prior missives that the consensus economic opinion opines that a recession will begin in 2020. So the next 19 months leading up to the national election are going to be interesting. As the administration considers the use of unconventional means to promote growth. To do anything to avoid a 2020 pre-election recession. Which would surely usher a Democratic candidate into The White House.
What does history say about the probabilities?
Eight of the last 11 recessions have coincided with the first year of a presidential term. Which Trump avoided. But he still contends with this: since Theodore Roosevelt, who left office in 1909, every single Republican president has seen a recession take hold in the first term. Yet, not since Carter in 1980 has a sitting president seen a recession begin during a re-election year.
Accordingly, one of three outcomes may occur:
1. The recession will be pushed up and occur in late 2019... Though there is currently scant evidence of a recession nine to 12 months out.
2. The recession will defy historical odds and begin next year... Which we find improbable. As all administrations have a myriad of levers to pull to spur growth and stave off a recession.
3. The recession will not occur until 2021, or later... Of which we see mounting evidence. And will discuss the possibilities of such an outcome in future missives.
So what else bears mentioning? Well, two cosmological marvels occurred last week.
In the world of sport, Tiger Woods completed one of history's most improbable comebacks. Winning The Masters Sunday after an 11-year Major victory drought.
Once viewed as a championship-obsessed automaton, Woods racked up victories but garnered a reputation for being selfish and immature. Eventually, his career was engulfed in scandal. And then beset by injuries that prevented him from walking. Let alone competing.
But 14 years after his last Masters win, and 11 years since his last Major, Woods reclaimed his spot among golf's all-time greats. This time, however, as a chastened, humble father of two who had to lose nearly everything before he could begin to win it back.
America loves stories of redemption. And Tiger's fifth Masters was exactly that. As fans around the world watched a man who was seen as cold, selfish and calculating become humanized. Saw him admit his mistakes. And seek forgiveness. All the while, never giving up on his dream of having his children watch him win championships. Hoping to earn their pride. While winning back his own.
Sunday's victory capped off an epic comeback saga that transcends sports. And taught everyone watching a powerful lesson. So long as we have love to lean on, a shred of perseverance, and hope to light the way? We can move on from all indignities. And aspire, yet again, to great accomplishment. Because life is always more elastic than it would seem at rock bottom. And there is no dream, regardless the dreamer, that exists beyond the frontiers of possibility.
Finally, we look beyond the frontiers of imagination.
While the presence of black holes may seem familiar from science fiction, humanity has only recently gotten an actual glimpse. Astronomers used a globe- spanning network of radio telescopes to reveal the "shadow" of a black hole. The first-ever observation.
According to The Wall Street Journal, "Observational evidence for black holes, with gravity so strong not even light can escape their grip, has piled up in recent decades. Some are gargantuan monsters lurking at the hearts of galaxies, including our own Milky Way, while others are invisible stellar corpses that tug on their companion stars."
Yet evidence was always circumstantial. Until now.
Three years ago, the Laser Interferometer Gravitational-Wave Observatory registered a chirp. It lasted fractions of a second. It was the sound of two black holes merging into one. Triggering gravitational waves amounting to subtle ripples in the fabric of space and time.
To verify the data, researchers determined to identify a black hole by its most distinctive feature -- the virtual boundary called the "event horizon." A line within these cosmological phenomena which marks the point of no return. Anything crossing it, including light, has no escape.
Dr. Ray Jayawardhana, an astrophysicist and dean of arts and sciences at Cornell, explains that a "carefully choreographed observation campaign and two years of painstaking analyses enabled the Event Horizon Telescope team to capture the shadow of a super-massive black hole, billions of times heftier than the sun, at the heart of a giant elliptical galaxy known as M87."
"If seeing is believing," Jayawardhana stated, "then we have finally glimpsed the monster's shadow. It appears that one of the weirdest constructs of the human mind exists for real. The transformation of the black hole from a mathematical oddity, emerging from Einstein's theory of general relativity, to an observable fixture of the cosmos is a testament to humanity's collective intellectual prowess, relentless curiosity and dogged perseverance."
Two events, one lesson: when we are focused and determined, there is nothing we cannot accomplish.
Onward and upward...
Weekly Results
Major indices finished lower last week. The DJIA lost 0.05%. The S&P 500 rose 0.51%. The Nasdaq climbed 0.57%. While small cap stocks gained 0.14%. 10-year Treasury bond yields rose 6 basis points to 2.561%. Gold closed at $1,313.70, up $11.22 per ounce, or 0.86%.