The Fears For A 2019 Recession Are Dead

The Fears For The Great Recession of 2019 Are Dead

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

Otherwise, enjoy the column!

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November 1

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Earnings continue to roll out, and based on the latest data from S&P Dow Jones, 339 companies in the S&P 500 have reported results. Of those, 75.2% have beaten estimates, while 17.1% have missed, and 7.7% have met. That is better than the average since the second quarter of 2012, which shows 69.8% have beaten, 17.1% have missed, and 9% have met.

(Data from S&P Dow Jones)

Earnings Facing Tough Comps

Currently, the data shows that earnings for the third quarter are expected to decline by 3.26% versus last year. It would mark the first decline in earnings in 2019. However, it is worth noting that the third quarter of 2018, was a record quarter with earnings per share of $41.38 and a growth rate of 32%, not an easy comparable.

(Data from S&P Dow Jones)

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Earnings Still Expected to Grow in 2019

Overall earnings in 2019 are now expected to rise just 5%, which is nothing fantastic, which is likely the reason we have seen such a horrible market throughout most of 2018 and 2019. However, growth is expected to return in 2020, and still, estimates show an increase of about 11.5%, with earnings per share rising to $177.55. It means the market is currently trading for roughly 17.1 times 2020 estimates.

(Data from S&P Dow Jones)

Turning to 2021

It would at least indicate to me by some extend the market based on 2020 estimates is at or approaching full valuation for 2019. 17 is the multiple I have been targeting all year.

Apply that same approach to 2021, I am currently model earnings of $197.21, giving the S&P 500 a PE ratio of about 15.5. At 17 times my 2021 earnings estimates, I show a fair value for the S&P 500 at roughly 3,350.  I am also modeling earnings of $162.98 in 2019, and $179.77 in 2020. So slightly higher than the S&P Dow Jones operating estimates.

(Data from Mott Capital)

It would suggest to me that as investors begin to turn their focus away from 2019, the prospects of 2020 and 2021 will help to lift the markets higher.

2019 Recession is Officially Dead

Additionally, still, there are no signs that a recession is coming. The GDP print for the third quarter of 2019, all but guarantees there is no chance for a 2019 recession since you need two consecutive of contract for a recession. It not to say you can’t have one that starts at the end of 2019 and goes into 2020, but the theory of a 2019 recession is all but dead.

No Recession in 2020?

I continue to believe that a recession is not on the horizon. The ISM PMI for October was 48.6%, which corresponds to a GDP growth rate of about 1.6%. Meanwhile, job and wage growth in October was healthy, with wages rising by 3%. This despite a GM strike and the issues that continue to plague Boeing and the production of its 737 Max.

We’ll see where we go next, but at this point, I am beginning to believe that 2020 will be a better year for the economy. At least that is the message that the Nikkei, DAX, KOSPI, Copper, ACWI, and Semis would suggest, just too name a few.


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.