Lots of shelled shocked investors out there today, after yesterday’s rather sharp and unexpected decline.  Blame global growth concerns and the yield curve for the decline if you want. Has Global growth slowed that much in the past 24 to 48 hours? Doubtful.

I wonder if anyone looked at the Feds projections for growth? Doubtful. Here they are for you too look and judge for yourself.  The Fed lowered its real GDP Growth projection for 2019 to 2.1% from 2.3%. The inflation rate to 1.8% from 1.9%, but cut their rate target to 2.4% from 2.9%. Point being that the growth downgrade and inflation targets were reduced modestly, but yet the fed funds rate target was cut drastically.

(FOMC)

I mean these aren’t real big growth downgrades.

Recession?

Then there are concerns about the PMI’s. The ISM PMI which is the one I follow more closely doesn’t suggest a recession is on the horizon either. February’s reading of 54.2 is well in expansion territory. Typically we have seen the start of a recession when the reading has fallen to 48 or below.

Is The Worst Behind Us?

Additionally, the ZEW economic sentiment for Germany saw a significant uptick in March, a reversal from the earlier trend. Again, I have said before, it could indicate that the worst is behind us.

Earnings Growth

Earnings continue to suggest that there is plenty of growth around as well. Earnings Estimates do continue to get trimmed but continue to indicate growth.

(Dow Jones S&P)

Valuation

Dow Jones S&P continues to see earnings growing by 9% in 2019 and 12.6% in 2020. The current earnings estimates for 2020 are $186.40. It means the S&P 500 is trading at 15 times 2020 estimates, which is a fair valuation. Based on the S&P 500’s current price to get an average of 17 times one-year forward earnings, earnings estimates for 2020 would need to fall $164.75, a drop of 11.6% or the index would need to rise to 3,168, an increase of 13% from its current level.

(Data from Dow Jones S&P)

In either case, it would at the very least suggest that the S&P 500 is roughly fairly valued at its current levels.

Which way the S&P 500 goes from here, is anyone’s guess. For now, it seems hard to say that a recession is on the way. Slower growth sure, but we already knew that.

-Mike

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