Stocks Outlook - Tuesday, April 17

Thoughts

1. Retail Sales growth: this bull market in stocks still has 1-2 years left.
2. U.S. could increase trade tensions with China. A short term bearish factor for the stock market.
3. Stocks’ reaction to their earnings is not a medium-long term bearish factor for the stock market.
4. Companies set to buyback $800 billion in stocks this year. A medium term bullish factor for the stock market.

1 am: Retail Sales growth: this bull market in stocks still has 1-2 years left.

Retail Sales increased 0.6% month-over-month (up 4.5% year-over-year). More importantly, the year-over-year growth in Retail Sales is flattening.

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This is typical of the final 1-2 years of an equities bull market and economic expansion. There are no signs of sustained economic deterioration right now, but the economy’s growth rate cannot really pick up. Growth is flattening. Retail Sales is a medium-long term bullish sign for the stock market right now. We are watching out for sustained deterioration in the economic data.

*The stock market and economy move in sync over the medium-long term.

1 am: U.S. could increase trade tensions with China. A short term bearish factor for the stock market.

China places a lot of restrictions on U.S. internet companies. For example, companies like Google and Facebook are banned from China altogether. Other companies like Microsoft and Amazon have to operate jointly with Chinese partners – they’re not allowed to operate independently in China.

The Office of the Trade Representative is currently considering placing a COMPLAINT against China’s unfair policies towards foreign tech companies.

If this COMPLAINT is actually announced, I expect it to be a short term bearish factor for the stock market. The market will probably fall for 1-2 days. But it is not a medium-long term bearish factor for the stock market. A complaint is not the same thing as an action. U.S. companies have long complained about China’s unfair policies towards foreign tech companies.

In addition, we can see that each trade-related news is having a smaller and smaller bearish impact on the stock market.

1 am: Stocks’ reaction to their earnings is not a medium-long term bearish factor for the stock market.

Many stocks have beaten their earnings estimates so far (e.g. banks). Yet these stocks have barely gone up. Bears assume that this is a sign of bearish price action: “nothing can push the stock market higher”. This isn’t true.

The stock market doesn’t always go up on earnings beats and it doesn’t always go down on earnings misses. That’s normal. What the stock market does after earnings season has little to do with what the stock market does during earnings season. For example, the Q2 2016 earnings season was very strong. Yet the stock market barely went up. The bears thought this was a bearish sign. It wasn’t. The stock market went up AFTER earnings season was over.

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Ignore the stock market’s price action vs. its earnings. There is no clear and consistent correlation between the stock market’s post-earnings season trend and its earnings reports.

1 am: Companies set to buyback $800 billion in stocks this year. A medium term bullish factor for the stock market.

Companies bought back $525 billion worth of their own stocks in 2017. This year? Companies are on track to buyback $800 billion. This is a massive 52% increase in share buybacks. Dividend payouts will rise slightly by 10%.

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This is why the stock market’s current “small correction” cannot turn into a “significant correction”. The “buy the dip” mentality is too strong, and companies are buying their own stocks when the market is making a short term decline. This is a medium term bullish factor for the stock market in 2018.