The Drop

  • Q4 earnings for the S&P 500 are up +14.5% y/y, revenues are +9% higher, 78% of companies are beating EPS estimates, and 75% are beating revenue estimates.
  • According to FactSet, earnings growth is expected to increase by double digits in every quarter of 2018, and to reach +17.9% y/y.
  • The correction has brought the PE of the S&P 500 down to 19.17 (based on trailing 12m earnings), and the forward PE is 17.25 (based on forward 12m estimates).
  • Small business sentiment is as high as it has been in 15-years (chart below)
  • The CPI was up 2.1% y/y in January, with the core up 1.8%.These are not high inflation rates when compared to the past, or to the Fed’s target of 2.0% inflation.
  • PCE (personal consumption expenditure), the Fed’s preferred inflation gauge, is only up 1.7% y/y, and the core PCE is only at 1.5%.
  • These relatively low inflation metrics, especially the PCE, means that the Fed is unlikely to raise rates faster than they have already telegraphed to the market (3 hikes this year).
  • Bond rates have been rising, but they are coming off extraordinarily low levels.The expanding business cycle will be able to absorb these higher rates — at least for the time being.
  • Although we view the Tax legislation and fiscal plan as a mis-timed action in the long-term, in the short-term, the lower tax rate on businesses and the infrastructure spending that is planned will be stimulating to the business cycle and deliver at least some money to main street (the real economy) which shouldincrease profitability (see above) and the velocity of money (which is at 60-year lows).These positive effects should last throughout the first half of 2018, taking the stock market higher.However, after that, the $1.2 trillion which will have to be borrowed is likely to affect rates, flatten the 10-year minus 2-year differential, and start the countdown to recession.

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ANG Traders

ANG Traders

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Forty years of private equity trading, and still learning.