Investors May Be Worried Over A Scenario That Simply Does Not Exist

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This week’s latest data is out from Dow Jones S&P; it shows that earnings, at least for this week, have stabilized, falling only slightly versus last week. Forecasts for 2018 now stand at $151.55 versus $151.60 last week. The earnings for 2019 have dropped to $166.00 from $166.06, while 2020 have fallen to $187.33 from $187.40.

(Dow Jones S&P)

Given all the revisions, growth rates have changed fairly materially over the past few weeks. Growth in 2019 is now forecast to rise by about 9.5%, up from prior estimates of around 7.6%. Meanwhile, 2020 earnings growth is forecast to increase by 12.85%, down from 13.25%.

(Data from Dow Jones S&P)

The PE ratio for 2019 dropped this week to 16.5, while the 2020 PE ratio dropped to 14.64.

(Data from Dow Jones S&P)

Better Growth, Low Multiple

What I find most interesting about the current market environment is that investors appear to be paying a below average price for what is expected to be above average earnings growth.

Since 1988 the S&P 500 has averaged a trailing-twelve-month PE ratio of 20.3, a current P/E ratio of 18.8, and next-twelve-month PE ratio of 17.7. Currently, the S&P 500, we find that the TTM PE ratio is 20.7, the current PE ratio of 18, the NTM PE ratio is 14.6. What we learn through this example, is that S&P 500 from a current PE and TTM PE ratio is fairly valued, but is well below the historical on a forward basis.

(Data from Dow Jones S&P)

But as the previous quarters continue to roll-off, the TTM PE will drop, and those multiples are likely to fall below the averages.

Also, for the S&P 500 to trade at its historical NTM PE ratio of 17.7, earnings estimates would need to fall about 17.3% to $154.90. That would wipe out all the earnings gains from 2019. Doesn’t seem likely at this point.

Additionally, earnings growth, despite being revised lower, are still growing at a faster pace than the historical of 8.1%, not including 2019 and 2020 estimates.

(Data from Dow Jones S&P)

Worry, Worry

So why is the market trading below these norms? Because of the fear that investors have about the US and the global economy. But GDP results for the fourth quarter were stronger than expected and the services ISM came in much higher than expectations and historically near its highest levels. Even the manufacturing ISM is still strong at over 54.

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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

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Meanwhile, the jobs report on February non-farm headline number was a disappointment. The numbers that do matter such as the unemployment rate continue to show some encouraging trend. The most significant trend is the number of people re-entering the workforce. That number peaked at 96.2 million Americans in August and September 2018 and has fallen 95.2 million.

Meanwhile, nearly everyone that wanted to find a job during the month, found one, with the number of unemployed falling by 300,000 and the number of employed rising by 255,000.

(BLS.gov)

For all the negative warnings signs floating around out there, I can point to plenty of positive signs floating around.

If earings are at the very least beginning to bottom, then it fair to say at current levels the market is fairly valued, while trading at a discount on future earnings. Additionally, it may entirely be the case that many investors are currently worried about a scenario that may not simply exist.

Of course, this all hinges on the fact that my outlook for the economy is not nearly as dire as many. Has growth slowed? Absolutely, it has stalled. Is growth turning into a contraction? At this point it hard to say that is the case.

-Mike

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Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.