November 20, 2018

Conference calls from S&P 500 companies are nearly all over now. The third quarter marked another record-high quarter for earnings and sales. Collectively, the S&P 500 results through the second week of November were 4.9% better than analysts expected during the last week of September – at the end of the third quarter – and 2018 full-year results are on pace to more than double late 2017 analyst expectations.

That’s important, because this market has only risen by about one-tenth the pace of earnings, and lately a gloomy spell has been cast over the market due to some bearish guidance about future quarters, perhaps delivered with an eye toward surprising analysts yet again with positive results in the coming quarters.

Despite all this downbeat rhetoric, economist Ed Yardeni wrote last Tuesday, “The negative guidance corporate managements provided during earnings conference calls didn’t deflate analysts’ consensus earnings estimates for Q4-2018 and the four quarters of 2019. In fact, the 2018 estimated earnings growth rate was steady during the 11/1 week at 23.6%, the highest reading for this series. The 2019 estimated growth rate edged down to 9.4%. The 2020 projected growth rate remained solid at 10.2%.”

As Yardeni’s chart shows below, in the rising red line, the 2018 earnings growth rate is liable to be more than double that expected at the end of 2017, reaching 23.6% vs. a predicted 11% at the end of 2017. The main reason for these revisions, of course, is the positive effect of the lowering of corporate tax rates for 2018, due to the tax reform act passed in late December 2017, giving the market a huge boost in January.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If you look at the actual and projected S&P 500 corporate earnings growth rates in the table (left, above), it works out to a cumulative growth rate of 65.7% in Trump’s first term (2017-2020) vs. just 15.8% in President Obama’s second term (2013-2016). Much of that growth is due to the corporate tax reform bill that took effect this year. The reversal of House leadership after the 2018 elections could halt any new Trump reforms, but it likely won’t reverse those 2018 tax benefits, so earnings growth could keep rising at double-digit rates (or nearly so) over the next two years, which should fuel continued market gains.

The scope and volume of business deregulation in the first two years under Trump has also helped grow earnings. Deregulation will no doubt slow under Democratic control of the House, but the combination of a tax cut and massive regulatory relief has given a big boost to small businesses, which caused the Small Business Optimism Index to soar after the Trump election and then to reach new all-time highs this year.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Last Tuesday, NFIB came out with an October reading of 107.4, down from 107.9 the previous month, but the summer NFIB readings were the most optimistic in the history of that index, founded in 1986 at the “100” mark, in the height of the Ronald Reagan-era boom, so small business is still clearly euphoric.

Another Reason for Thanksgiving: Rising Markets

The market has been frustrating this year. From a series of manic highs in the first four weeks of January, the market careened down 10% in just 10 trading days at the end of January and early February. After clawing back slowly for six months, the S&P 500 reached a new high of 2,930.75 on September 20, only to collapse by nearly 10% once again during a spooky October panic. Then, a fairly predictable election outcome lifted the market out of its doldrums with a 6.5% gain between the Halloween eve lows of October 29 and the Election Day morning-after glow of November 7, but the disputed House and Senate seat races over the next week sent the S&P down 4% in the following week. As we tally all the ups and downs through last Friday, the S&P is up barely 2% for the year, even though earnings are up over 20%.

Looking ahead to the Thanksgiving-to-New-Year’s Eve period, however, we can hold out some hope.  As Louis Navellier has said (above), “Traditionally the best day to buy is the Tuesday before Thanksgiving,” so I looked at the closing price on the Monday before Thanksgiving and compared it to the closing price of the year over the last 15 years. The results weren’t earth-shattering, but it was a healthy +2.5% gain.

Stretching out to 60 days and 67+ years, the average gains in November and December since 1950 are over 3%. According to the Stock Trader’s Almanac 2018, November and December (combined) gained 3.1%, while the best consecutive three months were November through January at +4.2%. The best six-month span was November through April, at +7.1%. In an easier-to-scan form, here are the best months:

If this history is any indication, we’re likely to gain about as much in the next six weeks as we’ve gained in the last 46 weeks. The holiday season typically has a euphoric effect on traders and investors, with holiday breaks, football, feasting, and family gatherings. In addition, many folks get Christmas bonuses to invest. Traders tend to unload some losers and switch to presumed future winners in smaller stocks, creating the “January Effect.” Others load up their pension plans in January, lifting the markets then.

Happy Holidays to all!

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*

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