Weighing The Week Ahead: Looking Beyond The Obviou

PG&E (PCG). The shares are rising despite the recent chapter 11 filing. The WSJ explains the risks.

Final Thought

If you missed my WTWA installment for last week, I urge you to go back and read the summary of methods and the “Final Thought.” In particular, those who followed the pundit-in-chief in finding an important message in the market decline were driven, once again, to sell at the bottom.

Briefing.com’s Big Picture column by Patrick J. O’Hare, is entitled Looking Back at the Market’s Test Run of a Recession-Minded Trade
provides a nice summary including plenty of charts. This is a good description of what happened, but Mr. O’Hare has the lesson wrong. He also includes some “indicators” that correlate with recessions. He warns against market timing.

A better lesson would be: Do not let the market be your indicator for economics. It is better to use economics (and resulting earnings) as an indicator for markets.

Earnings reports have put paid to the notion of a near-term recession, but that won’t last for long. I expect to hear plenty of talk about earnings “rolling over,” and the possibility of what some call an “earnings recession.” That has a nasty sound to it, but it does happen even in a period of overall growth.

Upside Risk

There are many sources highlighting downside risk in stocks, but few even mention the “upside risk” for those on the sidelines. Here are two takes on this topic:

FactSet monitors the bottom-up target price for the S&P 500 over the next twelve months. It is currently 3044, or a 12.6% increase from current levels. The analysts do not account for investor pessimism. They just look at the data for the companies they cover.

Davidson (via Todd Sullivan) is encouraged by vehicle sales and employment trends. Neither shows a sign of rolling over. He writes:

…we likely have at least a couple of years of continued economic expansion. What matters most is the high level of investor pessimism relative to economic and business fundamentals. There is a wide divide between current economic measures and investor perception. It is so wide that historical pricing suggests future SP500 levels couldreach higher than $4,000 in a few years should investor pessimism shift to historical levels of optimism. Even though markets have always ended with high levels of optimism, “euphoria” according to John Templeton, prices are dependent on market psychology. Market psychology will always remain unpredictable. The best we can do is to estimate the potential changes in market psychology and its impact.

Each time we see a market decline and rebound, many investors worry that they “missed their chance.” There is plenty of remaining time to profit if you look beyond the obvious near-term problems, which are falling away one-by-one.

[If you want some stocks that will participate in continuing economic growth or need a dependable method to generate income, send me a note. You might want to request some of my papers for individual investors, including those on Risk and Investor Pitfalls. Ask for my recent “client-only” paper on Lam Research. This company and many others will do just fine if the economy is merely reasonable. Just send an email to main at newarc dot com]

I’m more worried about:

  • A new arms race. Withdrawal from the decades-old agreement with Russia is worth consideration, but the decision-making process is troubling. The classic approach is to build a consensus with your own experts and then bring allies on board. There is a reason why methods become “classic.” (The Economist).
  • Mueller investigation issues. There are signs that a final report would not be public. This would not play well.

I’m less worried about

  • Trade issues. The various small leaks are what we would expect from slow and gradual progress.
  • The shutdown negotiations. I expect an agreement. No one will be a clear “winner,” but we’ll move on to more important issues.
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