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Lucky Patience, Growth Is Coming Back

They say it's better to be lucky than smart. On July 28, 1945, a B-25 bomber crashed into New York City's Empire State Building. Betty Lou Oliver was the elevator operator on the 80th floor. When the plane hit a floor below, Oliver got burned severely and needed immediate medical attention. Rescuers put her in the elevator, but the cables snapped and sent Betty Lou plummeting 75 floors to the basement of the building. Somehow, Ms. Oliver survived and holds a Guinness World Record for the longest survived elevator fall. She was back to work five months later. She survived the same fall that killed King Kong.

In a less life-threatening way, you could also consider yourself a lucky one if you hadn't sold out of desperation late last year. I recently saw a few headlines that Asian markets were down on renewed fears of a slowing U.S. economy and global trade. It's almost like there is a bin of "excuses" that gets recycled every now and then to try and attract fear-based clicks. The fact is, we are nearly eight weeks from lows, and we had yet another week of strength as indexes broadly rallied for another solid showing.

Growth is clearly coming back in the main indexes. The Russell and NASDAQ are the biggest winners, with the broader-based S&P 500 and industrials-focused Dow Jones Industrial Average "lagging." I put lagging in quotes because an eight-week +18% performance in any broad-based index is usually not associated with the word lagging. But lag they do, well behind the engines of growth.

Small caps are leading again, with the Russell 2000 posting a 4.17% gain last week. Look at the one-week return of the Russell 2000 Growth at 4.82%. The S&P Small Cap 600 also posted a huge 4.35% gain.

So, growth appears alive and well after all, blossoming from its drubbing last year. Growth was the whipping boy for those releasing their anxiety over a market "gone up too fast" and "global growth faltering will take us all down." Those headlines worked from August to December 2018. I must give the news outlets credit for trying.

Performance of major indexes over the past week and since Dec. 24

Sectors to pay attention to have been energy, industrials, consumer discretionary and info tech. Again, these are growth-laden sectors for the most part and not the safe harbors for bears seeking defensive plays. In fact, some of the defensive sectors are lagging. The utilities sector is up only 7.64% from Christmas lows and was the only sector to show a negative performance through Thursday last week. It's crazy to say this, but health care is the second worst performing sector since Christmas with a +14.93% screamer. What crazy times we live in.

Unprecedented selling met with unprecedented buying is where we are at. I remember having the conversations right around Dec. 24, when I was told, "This time feels different – I don't see a V-shaped recovery from this depth. I'd be surprised if that happens." After two decades working in the financial markets, I have come to find that the one thing there is really no room for is "surprise." The market is going to do what it is going to do, and the best thing to do to orient yourself is read the data that the market gives you.

December said that we were oversold, and our data said that we would rally. Now our data says we are overbought, but we can stay that way for a long while. Our signals have a time range component in them; that is, we look at a roughly three-month high and low to determine a shift or continuation of near-term trends. A three-month high is way easier to violate right now than a three-month low. In my opinion, what this means is that more time must pass – at least another four weeks – for us to start getting significant sell signals.

So where do I stand? I continue to be bullish on U.S. equities in the long term. In the near term, I am expecting a giveback, but again, we can stay on bullish momentum for quite a while. The January effect on big investors needing to deploy capital started the snowball rolling for a melt-up. It has pushed right into February, and we have further wind at our backs: earnings. Sales and earnings are largely working, and we are seeing many surprises.

According to FactSet Earnings Insight:

  • Earnings Scorecard: For the fourth quarter of 2018 (with 79% of the companies in the S&P 500 reporting actual results for the quarter), 70% of S&P 500 companies have reported a positive earnings per share (EPS) surprise, and 62% have reported a positive revenue surprise.
  • Earnings Growth: For the fourth quarter of 2018, the blended earnings growth rate for the S&P 500 is 13.1%. If 13.1% is the actual growth rate for the quarter, it will mark the fifth straight quarter of double-digit earnings growth for the index.
  • Earnings Revisions: On Dec. 31, the estimated earnings growth rate for the fourth quarter of 2018 was 12.1%. Today, seven sectors have higher growth rates (compared to Dec. 31) due to upward revisions to EPS estimates and positive EPS surprises.
  • Earnings Guidance: For the first quarter of 2019, 59 S&P 500 companies have issued negative EPS guidance, and 19 S&P 500 companies have issued positive EPS guidance.
  • Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.0. This P/E ratio is below the five-year average (16.4) but above the 10-year average (14.6).

More than 70% of companies are beating earnings estimates, and more than 60% are beating sales expectations. Earnings are still growing, with five straight quarters of double-digit growth and six sectors revised upwards from Dec. 31. Negative guidance means that companies are pricing in more realistic impacts of possible slowing growth. The P/E ratio for the S&P is reasonably below the five-year average. These are not weak stats by any means.

It would have been very unlucky to have sold at 2018 lows. The lucky ones held on and are more or less right back to where they were. As Tolstoy said, "The two most powerful warriors are patience and time."

The Bottom Line

Mapsignals continues to be bullish on U.S. equities in the long term, but we see a risk of a near-term giveback. We see the year-to-date lift in stocks as very constructive. As growth stocks gain on increasing volumes, we believe that earnings season could be better than overall expectations.