EC The Silencing Of The Bears

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There’s another way to view the economy, and that is through the eyes of small businesses. They are the engines of vibrant growth and well-being.

From my vantage point, economic optimism on the part of small firms has largely depended upon stimulus. That could come from central bank efforts to increase lending via low borrowing costs as well as access to that credit. It could also come from the fiscal stimulus in the form of tax breaks.

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What we see lately is that small business confidence has taken a rather big hit. And while the Fed has pulled back on its intent to tighten, the “new neutrality” is nothing like the third iteration of quantitative easing (QE3) in 2012. For that matter, it is nothing like the worldwide coordinated effort to expand balance sheet purchases or the tax reform hopes that sent confidence soaring alongside the November 2016 election.

3. Withering Earnings/Revenue and Ongoing Overvaluation

 It is not that earnings have been altogether terrible. Still, according to the Deutsche Bank’s equity strategists, S&P 500 corporations are barely beating consensus estimates. The beat rate is the lowest since Q4 of 2011. Meanwhile, sales fell below the average beat rate for the previous four quarters.

The most concerning dilemma? Forward guidance. Negatives earnings growth of 0.8% anticipated for Q1 2019 is a long way from 6.8% expected for Q1 2019 near the start of the 4th quarter, 2018.

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Moreover, the notion that the 2018 sell-off is serving up more attractive valuations is misleading. On measures most closely correlated with subsequent forward returns (e.g., market-cap-to-GDP, price-to-sales, Tobin’s Q, etc.), S&P 500 stock assets are still incredibly oversubscribed. Only the 2000 peak for market-cap-to-GDP is more egregious than right now. Indeed, one might recall that Warren Buffett described the indicator as the “best single measure of where valuations stand at any given moment” (2001).

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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