Economics

Skies Are Clear For Stocks To Rally

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A New Record High For Equities

The stock market is done with worrying about the coronavirus. With that in the rear-view mirror, suddenly the sky looks clear for a rally because the economy is turning around, inflation is low, there is no risk of a hawkish Fed (it’s only uncertain how many times it will cut), and the political clouds have dissipated. Earnings season hasn’t been bad for future estimates. The market looks ripe for a rally. 

Plus, there is less euphoria than there was a couple weeks ago. CNN fear and greed index is at 60 which is greed. That’s even though the market hit a new record high on Wednesday. Many are optimistic about the future, meaning the rest of 2020, if the Fed cuts rates once and Trump wins re-election.  

Markets Start To Price In A Trump Re-Election Victory

S&P 500 was up 1.13% on Wednesday and is now up 3.22% year to date. With the recent political news occurring, I’m raising my estimate for year to date returns to 7% from 4%. That could change dramatically if President Trump’s approval rating falls. He was acquitted on Wednesday which might further boost his approval rating to the low 50s.

Russell 2000 was up 1.52% because the 10 year yield rose another 5 basis points to 1.65%. Long bond yields rose with oil which is starting to price in the end of this slowdown period in the Chinese economy caused by the coronavirus; WTI was up 2.3% to $50.75. Because of this, energy was the best sector on the day as it increased 3.78%. Financials and healthcare rose 1.97% each. 

Banks liked the rise in long bond yields and healthcare is starting to price in a Trump victory. IHF health insurance ETF rose 3.79% which is a monster move. United Health rose 5.3%. The stock market smells a Trump victory. Real estate was the only losing sector as it fell 7 basis points because of the move in rates. VIX fell 0.9 to 15.15 as it is back to normal.

Nasdaq only rose 0.43% because Tesla stock crashed 17.18%. Many predicted the stock would crash 20% within the next few weeks. It literally happened the day after I predicted that. This was its worst decline in 7 years. It sold off because it was a bubble and because the company stated cars set for delivery in early February will be delayed because of the coronavirus. 

Its Shanghai factory will be closed by an extra week to week and a half. That’s not that big of a deal because it seems like the coronavirus is becoming less of an issue. Tesla stock fell because when a stock is priced for perfection, anything can knock it down. Shanghai Composite has increased in the past 2 days because the virus is under control.

Iowa Winner Still Unknown

Counting of the Iowa votes has been painstaking. As of Wednesday night, 97% of the votes were in. It could not be any closer as Buttigieg has 550 state delegate equivalents and Sanders has 547. Bernie is beating Pete by 3.4% in the first vote and 1.5% in the 2nd round. Both got 11 delegates. 

It seems like Biden is slipping in the polls and Pete is gaining. A problem for Pete is he still won’t win New Hampshire and he will have a tough time winning in the South. He’s not popular with African American voters like Biden is.

Recent polls show Sanders is winning New Hampshire by an average of 8.5 points. Biden is winning the national average by 5.2%. Pete is only at 7%. This explains why Pete only has a 10% chance of winning. Biden is at 14% because he came in 4th in Iowa and might not come in the top 2 in New Hampshire now that he has lost momentum. 

Bloomberg is at 22% and Sanders is at 47%. As you can see from the chart below, Bernie Sanders would raise taxes by the most and add the most new spending by a lot. The stock market isn’t selling off because Donald Trump’s odds of winning 2020 have reached 52%.

Q4 Earnings Season

This has been a good earnings season. Changes in analyst estimates as a result of this quarter show us that the earnings recession is near completion. Aggregate earnings fell 1.66% in Q4. There will either be 1 or 0 quarters in 2020 where aggregate earnings fall. 

As you can see from the table below, with 274 S&P 500 firms reporting earnings, EPS growth is 4.6% and sales growth is 2.98%. Average EPS surprise of 5.02% is above last quarter’s 3.92% and close to the 3 year average of 5.4%. 66% of firms beat sales estimates which is the same as the 3 year average. 

Utilities and real estate have the lowest percentage of firms that have reported results as only 21% and 39% have reported. Energy earnings fell 42.95%, while communication services earnings rose 20.58%.

Since the start of the year, Q1 EPS growth estimates have fallen from 3.68% to 1.84%. Estimates have fallen 0.61% in the past 5 days. As earnings season slows down in the next couple of weeks, growth estimates will stabilize. EPS growth estimates need to be above 1.11% on March 1st for this quarter to show improvement from Q4. 

The coronavirus’ impact might be enough to prevent an improvement from last quarter. Either way, it’s clear estimates foresee a ramp in growth as Q2 growth is expected to be 4.19% and Q3 growth is expected to be 8.07%.

Conclusion

Personally, I’m raising my 2020 S&P 500 target from expecting 4% returns to 7% returns. That’s because Trump’s odds of winning the 2020 election have increased and because earnings estimates have fallen less than usual this year. 

It appears there is little standing in the way of corporate profits with the Fed potentially cutting rates and the coronavirus becoming contained. The market likes certainty. Many see little uncertainty unless the political winds shift in the presidential election. 

The post Skies Are Clear For Stocks To Rally appeared first on Theo Trade.

Source: First Rebuttal

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