Wednesday, November 27, 2019
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Something for the bulls and something for the bears
Two years ago, bitcoin was the hot topic of conversation at Thanksgiving gatherings.
This year, it might be the stock market that is all the rage at the family table.
Stocks finished Tuesday's session at record highs with the Dow, S&P 500, and Nasdaq all logging record closes for the second time this week. The president and his daughter have both tweeted about the market’s records this week.
So when your extended family asks about why the stock market has been going up, there’s a whole menu of acceptable answers available. As many readers know, the reasons cited by the bulls and the bears to this question are often the same. All that really matters is how you say it.
"Trade optimism" and "trade pessimism," for example, are the easiest ways to explain any one day's move up or down in the market. The bulls see optimism as the real thing and pessimism as a temporary setback on the way to future optimism and trade deal between the U.S. and China. For the bears, trade optimism is re-branded as “hopium” while pessimism is the market finally appreciating the disaster you’ve always known the trade war would be.
Now, if you want to sketch out the longer-term view on why stocks have gone up so much this year, the Fed’s three rate cuts, the strength of the U.S. consumer, and the surprisingly positive third quarter earnings season will get the job done for the bulls.
According to data from John Stoltzfus at Oppenheimer, with 476 of the S&P 500’s members having reported results through the end of last week earnings were down 0.98% and sales up 3.6% during the third quarter. This compares to expectations that earnings would drop 4% during the quarter.
“Considering the ongoing trade dispute with China, tougher comps versus 2018 (the first year of tax reform, which boosted earnings to double-digit growth for the S&P 500 as corporate tax rates fell dramatically) Q3 earnings season has been ‘ok’ if not pretty darned good,” Stoltzfus adds.
This is the bull case in a nutshell: all the stock market cares about is whether things are better or worse than expected. And corporate data during this most recent earnings period has been clear.
For the bears, the Fed, the consumer, and earnings are merely sources of market manipulation, an over-leveraged consumer class propping up the world’s biggest economy via unsustainable spending habits, and proof that most investors are just fools.
Because while earnings might have come in better-than-forecast, corporate profit growth is still negative. Which means investors have been paying more for less when it comes to the stock market. And indeed, the S&P 500’s earnings multiple has expanded from under 20 at the beginning of the year to just over 23 today, according to data from Robert Shiller.
This also leaves out an economy that, though it is still growing, is expanding at a markedly slower pace than last year. In the third quarter, the economy grew at a pace of just 1.9% and data from the Atlanta Fed suggests the pace of growth could slow to around 0.5% in the fourth quarter.
All of this looks better for the bears, who haven’t even gotten to the source of the market’s incremental bid.
“Fundamentals and growth are the primary drivers of equities,” said Keith Parker at UBS in a note to clients this week, “but positioning and liquidity has helped underpin this year's rally.”
“Short covering, foreign buying, buybacks, [and ] the Fed” have been the primary drivers of the market’s recent rally to record levels, Parker notes.
Which means the buyers in this market have been companies, foreign investors, and investors betting against stocks bailing on their positions. And when you consider that the fundamental backdrop of negative earnings growth and economic growth slowing isn’t exactly inspiring, a market driven by forced buyers and corporate repurchases leaves the bears equipped to diss this rally as weak and unsustainable.
But then again, the bearish case for anything — stocks, the economy, the fate of civilization, etc. — always sounds smarter. Bears have the luxury of telling a story with a beginning, middle, and end; for the bulls, the market presents more open-ended questions and fewer definitive answers.
So if you want to impress your family, be bearish. If you want to bore them, be bullish. If you want to annoy them, talk bitcoin.
What were the best and worst companies of 2019? CLICK HERE
What to watch today
7 a.m. ET: MBA Mortgage Applications, week ended November 22 (-2.2 prior)
8:30 a.m. ET: GDP Annualized quarter-on-quarter, Q3 second reading (1.9% expected, 1.9% prior); Personal Consumption, Q3 second reading (2.8% expected, 2.9% prior); GDP Price Index, Q3 second reading (1.7% expected, 1.7% prior)
8:30 a.m. ET: Core PCE quarter-on-quarter, Q3 second reading (2.2% prior)
8:30 a.m. ET: Durable Goods Orders, October preliminary (-0.7% expected, -1.2% prior); Durables excluding Transportation, October preliminary (0.2% expected, -0.4% prior); Capital Goods Orders Nondefense excluding Air, October preliminary (-0.3% expected, -0.6% prior)
8:30 a.m. ET: Initial Jobless Claims, week ended November 23 (220,000 expected, 227,000 prior); Continuing Claims, week ended November 16 (1.695 million prior)
9:45 a.m. ET: MNI Chicago PMI, November (47.0 expected, 43.2 in October)
9:45 a.m. ET: Bloomberg Consumer Comfort, week ended November 24 (59.1 prior)
10 a.m. ET: Personal Income, October (0.3% expected, 0.3% in September); Personal Spending, October (0.3% expected, 0.2% in September)
10 a.m. ET: Pending Home Sales month-on-month, October (0.0% expected, 1.5% in September)
6:45 a.m. ET: Deere (DE) is expected to report adjusted earnings of $2.13 per share on $8.40 billion in revenue
HP Inc (HPQ)
Dell CFO says 'pleased' with earnings results [Yahoo Finance]