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Algo’s Are In Control
The algo’s continue to rule the land and today was no different than the previous day. It is starting to become hard even to find the silver linings. What had me most bothered by today’s price action was the performance of the Russell 2000. The index just keeps dropping. The index is now down almost 19% from its highs at the end of August. The NASDAQ is now down 15% from its highs, while the S&P 500 is down over 11%
Unreal!
What pretty much went unnoticed today was that the Atlanta Fed GDPNow is tracking fourth quarter GDP at 3.0%. Even the CNBC rapid update is tracking the quarter at 3%. It’s kind of hard to imagine that the market is worrying about an economic slowdown when GDP for the fourth quarter is tracking at 3%.
The latest data out of Dow Jones S&P yesterday is suggesting earning growth for next year at 10.3% to $173.50. It leaves the S&P 500 now trading at 15 times 2019 earnings estimates.
Again, the GDP growth rate would suggest the economy is still strong. While earnings estimates fall slightly, it is hard to imagine that the market is down this sharply when earnings growth is forecast at 10%.
If earnings growth goes to zero next year and we maintain this year’s estimates of $157.29, the S&P 500 would still be trading at 16.5 times earnings. If earnings were to plunge 10% from 2018 views to $141.56, the S&P 500 would be trading at 18.3 times earnings. Earnings estimates would need to fall 20% to 2017 results of $124.51 for the PE to climb to 20.8.
You know what the PE multiple was in March of 2016? It was 20.9. Why does that matter, because during that point earnings were dropping, and had fallen 12% y/y. Meanwhile, there were real threats of not a global slow down, but a global recession as fears of deflation were taking grip. It was at that time the ECB and BOJ instituted negative interest rate policy and massive QE programs.
I’m sorry, this is just ridiculous it is. Are things slowing, sure we can’t deny that. This is crazy. The market is pricing things for not only no earnings growth next year, but for earnings to drop 20%.
I’m going to have a drink!
-Mike
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