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Get Happy! An Update on Earnings Season

Get Happy! An Update on Earnings Season - smiley money

 

The stock market bulls are clearly winning in 2017. As the U.S. economy heats up, the bottom line of S&P 500 companies is swelling once again.

Earnings Season

As you all know, we’re still finishing up the 4Q16 Earnings Season. Here's the score so far:

 

  1. 452 of 500 S&P 500 companies have reported results
  2. Aggregate year-over-year SALES growth = +4.6%
  3. Aggregate year-over-year EPS growth = +4.9%
  4. Information Technology (61 of 66 reported): 7.0% and 10.3% sales and earnings growth
  5. Financials (61 of 63 reported): 4.4% and 7.9% sales and earnings growth

 

Those are a few of the winners. The key callout on the losing side is Energy (XLE) which has had an unequivocally bad Earning Season:

 

  1. 31 of 35 “Energy” companies in the S&P500 have reported results
  2. Aggregate year-over-year SALES growth = +2.6%
  3. Aggregate year-over-year EPS growth = -10.1% 

 

Get Happy! An Update on Earnings Season - earnings season 2 24 17

Sector Performance

Earnings exuberance (outside of the Energy patch) is clearly being priced into markets. That's why Tech, Healthcare, Consumer Discretionary and Financials are leading year-to-date. Unsurprisingly, the Energy sector is the laggard after posting underwhelming earnings growth.

 

Here's the sector performance update:

 

  • S&P 500: +5.6%
  • Technology (XLK): +8.6%
  • Energy (XLE): -4.9%

 

Get Happy! An Update on Earnings Season - sector perf 2 24 17

Bottom Line

We remain bullish on the U.S. stock market as earnings growth mirrors the broader acceleration of the American economy. 


Existing Home Sales Hits 10-Year High, But The Media Missed This Disconcerting Trend

Existing Home Sales Hits 10-Year High, But The Media Missed This Disconcerting Trend - home sales

 

Existing Home Sales hit a ten-year high for the month of January.

 

Lost in the decade-long housing high headlines was the disconcerting decline in inventory (or housing supply) to its lowest level ever. As Hedgeye U.S. Macro analyst Christian Drake writes in today's Early Look:

 

"Months-supply of inventory fell to a record low 3.56-months (6-months of inventory is conventionally considered a balanced market) with months-supply falling year-over-year for 14 consecutive months and for 26 of the last 27 months. 

 

On a unit basis, inventory fell -7.1% YoY, marking the 20th consecutive month of negative year-over-year growth. Recall, while sales data is seasonally adjusted, the supply data is not, so the YoY figures offer the cleanest read on the underlying trend.

 

While some of the supply issues are cyclical in nature, the lead constraints are primarily secular."

 

Drake lists five "secular" supply headwinds, including low rates, households that still have negative home equity, negative demographic trends, new home price premiums and the post-crisis demand for rental properties that will constrain the upside in sales.

 

Existing Home Sales Hits 10-Year High, But The Media Missed This Disconcerting Trend - CoD EHS Supply

 


Here's What Volatility Reveals About This 'Expensive' U.S. Stock Market

Here's What Volatility Reveals About This 'Expensive' U.S. Stock Market - bump ahead

Source: RoadTrafficSigns.com

 

The big money in markets is often made by seeing what others don't. It's about resisting the gravitational pull of consensus, treading lightly where consensus is right, while spotting subtleties where the herd might be wrong. 

Where Consensus Could Be Wrong: Volatility

#Volatility #ElectionDay

 

One subtlety we've been watching recently is volatility. Volatility, of course, is the measurement of the daily market fluctuations. In times of fear, the volatility of an asset rises. In times of buoyancy, all is well. The market simply floats higher and volatility falls.

 

We have a nuanced view of volatility here at Hedgeye. Conceptually, there are two types of volatility we're looking at, realized volatility (i.e. the volatility of an asset historically) and implied volatility (i.e. investors' expectations of future volatility that's embedded in options markets).

 

These volatility readings are painting a clear picture for investors today. As the stock market continues to make all-time highs, historical or realized volatility is falling to cycle lows. Meanwhile, fearful traders expect rising future volatility in the stock market and are buying downside protection in options markets to stave off the pain of an impending correction. 

 

The Chart of the Day below from today's Early Look is a visual representation of precisely that. The S&P 500 implied volatility premium on a 30-day basis is 52.2%. That's a fancy way of saying investors are fearful of downside risks as historical volatility continues to fall. Note: A premium this high in the stratosphere hasn't been hit since before Election Day. 

 

Here's What Volatility Reveals About This 'Expensive' U.S. Stock Market - 02.22.17 EL Chart

Where Do We Go From Here?

#Economy #RetailSales #Inflation

 

Investors must put this volatility measure in the context of where we're at in the economic cycle. Unsurprisingly, U.S. economic growth and inflation drive financial market returns. We believe both growth and inflation are accelerating.

 

Retail sales and inflation reports last week were near or above 5-year highs.

 

With this positive backdrop, we think equity markets can head higher from here. In other words, investors betting on significant future downside will get squeezed out of those positions.

 

It might actually be more risky piling into sectors like Consumer Staples (XLP) and Utilities (XLU), which are typically equity exposures investors buy when future downside is expected. In these sectors, implied volatility premiums are infinitesimal, 0.3% for Consumer Staples and 4.8% for Utilities. Implied volatility premiums this low suggest investor complacency. 

Bottom Line

The prevailing market trends say stick with U.S. equities here. 


Stock Market Bulls Versus Bears: What's Winning In 2017 & Why

Stock Market Bulls Versus Bears: What's Winning In 2017 & Why - Pamplona Statue group of Encierro2

 

It's been a whirlwind past few weeks in financial markets. The S&P 500 continued higher (up +5% already this year) to the dismay of stock market naysayers everywhere. "I can't stress how important it’s been to be Bullish Enough" on the stock market, writes Hedgeye CEO Keith McCullough in this morning's Early Look.

 

A quick review of what's working in 2017 reveals exactly that. In the Chart of the Day below, we show the S&P 500 broken down across a variety of "style factors" (i.e. market attributes like large-cap versus small cap stocks).

 

The chart below compares the performance of stocks in the top quartile (top 25%), based on these style factors, against the stocks in the bottom quartile (bottom 25%). Sticking with the large-cap, small-cap example, it shows the top 25% of larger cap stocks in the S&P 500 are up +5.2% year-to-date versus +2.3% for the bottom 25% of smaller cap stocks.

High Beta Vs. Low Beta

The key callout is the performance of high beta versus low beta. High beta stocks are stocks most tethered to the direction of the stock market. If the S&P 500 heads higher or lower so too will high beta stocks. The highest of high beta stocks means the move could be particularly profitable as the market heads higher (since these stocks rise in excess of the market move). The downside is also more painful if the broader market falls.

 

Here's the breakdown of performance year-to-date:

 

  • High Beta: +6%
  • Low Beta: +3.3%

 

Even more drastic is 6-month performance. High beta is up +16.7% versus low beta +0.5%.

 

Then there's high beta and low beta sectors. Financials (XLF) are more tethered to moves in the market (i.e. high beta) versus low beta Utilities (XLU) stocks. Check out the breakdown year-to-date:

 

  1. Financials (XLF): +5.3%
  2. Utilities (XLU): +2.1%

 

Stock Market Bulls Versus Bears: What's Winning In 2017 & Why - 02.21.17 EL Chart

U.S. Growth & Inflation Accelerating

The market moves were supported by economic data last week. Year-over-year growth in both retail sales and inflation are near or above 5-year highs

 

  • Retail Sales: The year-over-year growth rate in retail sales hit 5.6% yesterday, a level not seen since March 2012. Digging deeper into the report, the retail sales “control group” (a good proxy for the input into the consumption component of US GDP) accelerated to +4.0% year-over-year growth for the month of January versus +3.4% growth in December.
  • Consumer Price Inflation: Core inflation just hit the highest level in 5 years. CPI accelerated to +2.5% year-over-year in January versus +2.1% in December. Inflation has now accelerated for the 6th consecutive month.

 

Stock Market Bulls Versus Bears: What's Winning In 2017 & Why - growth inflation

Bottom Line

You might be wondering, where do we go from here? We expect the U.S. economy to continue to accelerate. That will be supportive the U.S. stock market going forward. 


Trump's Fed Pick: Who Will Replace Yellen? (The Hawks Come Home To Roost)

Trump's Fed Pick: Who Will Replace Yellen? (The Hawks Come Home To Roost) - hawk 2 17 17

 

Federal Reserve Chair Janet Yellen should be "ashamed of herself" for keeping interest rates low and creating a "false stock market," President Donald Trump said on the campaign trail last September. It's safe to assume that when Yellen's current tenure is up on February 3, 2018 Trump won't be offering her a second term.

Who Is Trump's pick for Fed Chair?

#Fed #Yellen #TaylorRule

 

The speculation about who will replace Yellen is heating up. Hedgeye Senior Macro analyst Darius Dale has a few ideas in this morning's Early Look. We won't give you the whole run-down but one of the likely candidates is influential Stanford economics professor John Taylor.

 

Taylor has been a vocal critic of the Fed and is widely acclaimed for the "Taylor Rule." We'll spare you the details crafted in the hallowed halls of academia. Essentially, the Taylor rule is a formula that prescribes the proper interest rate so that an economy can operate at maximum employment, inflation and GDP.

 

Taylor is a true believer in monetary policy rules. "Had the Fed not deviated from rules-based policy before the [2008 financial] crisis, unemployment would not have increased so much," Taylor wrote recently.

What Does this mean for Investors

#Hawkish #RateHike

 

If the Fed enacts a rules-based monetary policy, this would mark a fundamental shift from current easy money policies. As Dale writes this morning, "We can’t stress enough how much of a hawkish shift in policy that would represent."

 

The Chart of the Day below shows what the Taylor rule suggests for current and future interest rates. Way below the Taylor rule's prescribed rate (the red line) is the Fed's dot plot (each member's estimated policy rate, with the black line representing the median rate).

 

Take a look. "Needless to say, we don’t think market participants are prepared for a 4% Federal Funds rate by year-end 2018," Dale writes.

 

Trump's Fed Pick: Who Will Replace Yellen? (The Hawks Come Home To Roost) - Chart of the Day 2 17 17


Growth Accelerating + Inflation Accelerating = Bullish for Stocks

Growth Accelerating + Inflation Accelerating = Bullish for Stocks - growth

 

Key economic data (U.S. retail sales and inflation) reported yesterday confirms what we've been saying here at Hedgeye for some time now... U.S. growth and inflation are accelerating. Year-over-year growth in both data sets are near or above 5-year highs. 

 

Okay. Obvious statement of the day: Growth and inflation accelerating is bullish for the U.S. stock market.

 

The epic Trump trade -- one which has propelled U.S. stocks to record highs across all three major indices -- continues. 

1. Retail Sales 

The year-over-year growth rate in retail sales hit 5.6% yesterday, a level not seen since March 2012. Digging deeper into the report, the retail sales “control group” (a good proxy for the input into the consumption component of US GDP) accelerated to +4.0% year-over-year growth for the month of January versus +3.4% growth in December.

 

Growth Accelerating + Inflation Accelerating = Bullish for Stocks - retail sales 2 15 17

2. Consumer Price Inflation 

Core inflation just hit the highest level in 5 years. CPI accelerated to +2.5% year-over-year in January versus +2.1% in December. Inflation has now accelerated for the 6th consecutive month.

 

Growth Accelerating + Inflation Accelerating = Bullish for Stocks - 02.16.17 EL Chart

the Fed Is Falling Behind

Fed head Janet Yellen said yesterday that the U.S. economy was "very close to achieving" objectives of maximizing employment and maintaining a stable inflation rate of 2% (the Fed's inflation target). 

 

For some time now, we've been arguing that the Fed risks falling behind the curve if they don't raise rates (and soon). Our proprietary leading indicator on inflation suggests year-over-year CPI readings could hit three, even four, percent in the first quarter of 2017, as previously beleaguered commodity prices contribute to inflation growth in the coming months. 

 

This would shock Yellen & Co. An inflation rate at or above 4% hasn't been seen since September of 2008. In other words, we may need more rate hikes than the two or three currently expected by the market in 2017.

 

To recap...

Both retail sales and inflation suggest the U.S. economy is heating up. That's bullish for the stock market. And watch the Fed. They're already falling behind the curve on this growth and inflation data.


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