Thursday was another wild day for stocks but forget the noise; let’s look at the facts. First, major indices continue to close at new highs, even when intraday rallies are erased. Secondly, the fundamental news continues to be impressive. Even recent pullbacks in certain data points are only natural when many are at coming down from levels not seen in more than a decade.
Earnings Update
Well, 24% of S&P 500 names have reported, and financial results have been on fire, but have they been good enough? The market is in the midst of the kind of rally that must be justified daily; even then, the chorus of bears and doubters will roar their disapproval and their predictions of doom.
The fact is that most have been standing on the doom-and-gloom soapbox for the 20,000 points on the Dow. It is of no consequence because they are always treated like Nostradamus when the market crashes.
That being said, this market has enjoyed one of the best stretches in history, especially when measured against the backdrop of zero volatility. For many investors, it just doesn’t feel right when you expect equity futures to be higher, and stocks to bolt out the gate each morning like thoroughbred racehorses.
I understand that part. To be sure how markets act during short-term stretches can be influenced by many things, often having nothing to do with actual business fundamentals or the economy. That’s why this earnings period is so critical. Numbers and guidance must be robust; thus far, they have been.
Top-Line
I noted coming into this earnings period that my focus was on the top-line. Indeed, revenues have beaten the Street 81% of the time at a blended rate above the historical average. Top-line momentum is a great proxy for the economy and consumer confidence.
Bottom-Line
The earnings picture is just as impressive as the top-line according to FactSet data. In yesterday’s session, 76% of S&P 500 beat the Street with a growth rate of 12%, well above the historical average.
After the close, Starbucks (SBUX) posted results that beat on earnings but came up short on revenue and comparable sales and that stock is under pressure.
Overbought?
While economic fundamentals are amazing (both domestically and outside the United States), many are calling for a pullback based on equity valuation. There are countless ways to assess value, but the metric most often sighted is the price-to-earnings (P/E) ratio.
The P/E ratio can be read looking forward 12-months which is the one I like in part because the market is a forward-looking barometer and harbinger of the future developments. On that note, the current Forward price-to-earnings (P/E) ratio is 18.4, which is well above the average of 15.9, but it is nowhere near levels associated with market crashes.
On the other hand, the 12-month trailing P/E ratio is at the point that signaled the great tech crash of 2001. It’s not something I dismiss out of hand, but all of this gets me to circle back to the underlying economy and economic momentum that is only going to gain strength near-term.
Shaking Out the Weak Hands
So, what’s up with the extra volatility? I think this is a deliberate attempt to scare investors out of the market. As fresh money comes into equities, there are powerful folks who pull strings, and they understand how to manipulate the emotions of unconfident people who have waited a long time to jump into the fray.
Knowing the psychology of buyer’s remorse and also knowing a large swath of people on the sidelines are going to dive in at Dow 30,000. Right now is the time to shake out weaker hands, hence the wild gyrations this week.
Hold the Line
Obviously, markets go up and down, but I continue to caution you not to be shaken out of the market. Take profits when individual stories change; more importantly, take losses for that same reason. However, don’t allow the masters of the universe that have largely missed this rally buy the dips created from shaking you out of the market.
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