Weighing The Week Ahead: Looking Beyond The Obviou

The Bad

  • Consumer confidence from the Conference Board declined to 120.2 missing expectations of 126.1. The prior reading was revised down from 128.1 to 126.6. Jill Mislinski updates the best chart of this series.

  • Pending home sales declined 2.2%, worse than the prior month decline of 0.9% and missing expectations of 0.7% growth. Calculated Risk has the story.
  • Initial jobless claims spiked to 253K. E 220K and P 200K. The government shutdown was the key factor, so it will take some time to see if there is a real change in claims.
  • The 115th Congress functioned poorly over the last two years using the Bipartisan Policy Organization’s Healthy Congress Index. It was derelict in basic duties like days spent on legislative business, budget and appropriations, substantial committee process with the ability to offer amendments, and the amount of oversight.

The Ugly

The Foxconn saga. Bidding wars to attract private employers create a dilemma for political leaders. People focus on the announced job creation potential without a real cost-benefit analysis. Should Wisconsin be offering $3 billion in incentives for a facility that (originally) was supposed to require a $10 billion investment and employ 13,000, many in manufacturing jobs. The company announced last week that it would cut back and possibly shelve plans. Two days later, after some Trump arm-twisting, the plan is on again, although in a smaller form. (MarketBeat).

This is a complex subject, but interstate competition is not an overall winner for taxpayers.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

The calendar is a light one, but there will be earnings reports from 100 members of the S&P 500. I am mostly interested in auto sales and the ISM non-manufacturing index.

We can also expect an increase in political posturing reflecting the new Congressional divisions.

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.

Next Week’s Theme

Last week included improvement on several key market worries: the economy, the Fed, corporate earnings, and the government shutdown. Anyone who really believed that these were all important concerns might have expected a larger stock market rebound. Instead, there are already suggestions for replacement worries!

Investors need to be forward-looking. This includes more than a daily recitation of everything that might go wrong. The pundits may not help with this, but investors should be emphasizing –

Looking beyond the obvious.

Using earnings season as the main theme, I will suggest some easy ways to accomplish this goal.

  1. Use expected earnings in your market analysis. The most compelling reason is that it works better than either current earnings or formulaic analysis of past earnings. As earnings season unfolds, you see plenty of emphasis on guidance and outlook and little discussion of things that happened ten years ago. If this is how the market evaluates individual companies, why should we expect a different approach to the resulting broad averages? FactSet regularly runs this chart which shows the relevance of forward earnings for markets. Note that it is a constantly moving 12-month forward look, not the fixed calendar approach used by most sources.

  1. Choose the right time frame. Make sure it is related to your investment horizon. A good example was a story this week about plunging natural gas futures. Right in the middle of the polar vortex. Why? The weather report for next week called for higher temperatures. Anyone trading natural gas futures must trade in that time frame. But what about the long-term equity investor? Barron’s (to pick one source from many) has the decline in expected earnings as this week’s cover story. Jack Hough notes that Q119 earnings may decline by 1%.

FactSet notes that the median, bottom’s up estimate has declined by 4.1% during the first month of the quarter. A decline during the first month is normal, but the average over fifteen years is 1.7%. FactSet emphasizes continuing strong reports for Q418. Hough cites good reasons to believe that the full year will be better than the first two quarters.

I suggest that the first two quarters are the expected result of some unusual events – events which are now obvious. Unless you want to change your investment posture with the weather, take a longer look. Brian Gilmartin has a very nice table of earnings revisions by week, with a note about the major events. The table helps to illustrate what factors are at work in the earnings revisions. It also reminds us that there are always upward revisions in some stocks and sectors. Looking only at the net result overlooks important information.

  1. Beware of a media emphasis on big stock reactions. This focus on the dramatic, easily understandable story is misleading. Mike Williams describes The Cycle That Triggers a Financial Crisis. He writes:

    Surely the topic of “the next recession” is always a great piece for the financial media to cover because bad news tends to grab attention.

    For example, CNBC recently posted a story entitled:  “Five financial heavyweights weigh in on whether the next recession is nearing.”

    This is precisely what happens when an earnings report generates a dramatic price move.

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