February 20, 2019

They say it’s better to be lucky than smart. On July 28, 1945, a B-25 bomber crashed into the Empire State Building, in New York City. Betty Lou Oliver was the elevator operator on the 80th floor. When the plane hit a floor below, Oliver got burned severely and needed immediate medical attention. Rescuers put her in the elevator, but the cables snapped, sending Betty Lou plummeting 75 floors to the basement of the building. Somehow, Ms. Oliver survived and holds a Guinness World Record for the longest survived elevator fall. She was back to work five months later. She survived the same fall that killed King Kong.

While that’s undeniably lucky, you could consider yourself a lucky one if you didn’t sell stocks out of desperation late last year. Last Friday morning I saw headlines that Asian markets were down on renewed fears of a slowing U.S. economy and slowing global trade. It’s almost like there is a bin of excuses that get recycled every now and then to try and attract fear-based clicks. The fact is, we are nearly eight weeks off the Christmas lows, with yet another week of strength in the broadly rallying market indexes.

Growth is clearly coming back in the main indexes. The Russell 2000 and NASDAQ are the biggest winners with the broader-based S&P 500 and Dow Industrials “lagging.” I put lagging in quotes because the S&P 500 is up 18.06% vs. 20.66% for NASDAQ, hardly a “laggard” by normal definitions.

Small caps are leading again with the Russell 2000 posting a +4.17% gain last week. The 1-week return of the Russell 2000 Growth is +4.82%. The S&P Small Cap 600 also posted a strong +4.35%. So, growth appears alive and well, blossoming from its drubbing last year. Growth was the whipping boy for those releasing their anxiety over the “global growth faltering” excuse from late last year. Those headlines worked from August to December 2018, so I must at least give the news outlets credit for trying.

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

Growth Sectors Continue to Lead the Pack

Sectors to pay attention to have been Energy, Industrials, Consumer Discretionary, and Info Tech. Again, these are growth-laden sectors, not safe-harbors for bears seeking defensive plays. In fact, some defensive sectors are lagging. Utilities are up only +7.64% from their Christmas lows – and the only sector to show a negative performance last week. It’s crazy to say this, but the third-worst performing sector since Christmas – Health Care – has earned a +14.93% scorecard. What crazy times we live in.

The story is: Unprecedented selling met with unprecedented buying. I remember having conversations right around December 24th where I was told, “This time feels different; I don’t see a V-shaped recovery from this depth. I’d be surprised if that happens.” After two decades, I still feel the market is going to do what it is going to do and the best thing to do to orient oneself is read the data that the market gives you.

December said we were oversold, and our data said we would rally. Now our data says we are overbought but we can stay that way for a long while. Our signals have a time range component in them, that is, we look at roughly a three-month high and low to determine a shift or continuation of near-term trends. A three-month high is way easier to violate right now than a three-month low. What this means is that more time – at least another four weeks must pass, in my opinion – for us to start getting significant sell signals.

So where do I stand? I continue to be bullish on U.S. equities, long term. Near-term, I expect a give-back, but we can cruise on bullish momentum for quite a while. The January effect on big investors needing to deploy capital started the snowball rolling for a melt-up. It’s pushed into February, and we have further wind at our backs via earnings. Sales and earnings are largely working, and we are seeing many surprises.

According to FactSet Earnings Insight for February 15:

  • Earnings Scorecard: For Q4 2018 (with 79% of the companies in the S&P 500 reporting actual results for the quarter), 70% of S&P 500 companies have reported a positive EPS surprise and 62% have reported a positive revenue surprise.
  • Earnings Growth: For Q4 2018, the blended earnings growth rate for the S&P 500 is 13.1%. If 13.1% is the actual growth rate for the quarter, it will mark the fifth straight quarter of double-digit earnings growth for the index.
  • Earnings Revisions: On December 31, the estimated earnings growth rate for Q4 2018 was 12.1%. Seven sectors have higher growth rates today (compared to December 31) due to upward revisions to EPS estimates and positive EPS surprises.
  • Earnings Guidance: For Q1 2019, 59 S&P 500 companies have issued negative EPS guidance and 19 S&P 500 companies have issued positive EPS guidance.
  • Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.0. This P/E ratio is below the 5-year average (16.4) but above the 10-year average (14.6).

With 70% of companies beating earnings and more than 60% beating sales, and five straight quarters of double-digit earnings growth and six sectors revised upwards from December 31, it’s no wonder we are hearing some “negative guidance” as companies are pricing in a more realistic impact of possible growth slowing, but the S&P’s P/E ratio is below its 5-year average. These are not weak stats by any measure.

It would have been very unlucky to have sold at the 2018 lows. The lucky ones held on and are more-or-less back to where they were. Tolstoy said, “The two most powerful warriors are patience and time.”

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. *All content of “Sector Spotlight” represents the opinion of Jason Bodner*


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