May 15, 2018

Don’t look now, but all four major stock market indexes are up for the year through Friday, May 11:

What’s more impressive, the market rose last week in the face of what was anticipated to be “bad news.”  On Tuesday, when President Trump pulled the U.S. out of the Iran nuclear weapons accord, the market initially sold off but then finished positive. Then, on Thursday, inflation came out lower-than-expected, which could be a sign of a slowing economy (“glass half empty”) but the market took that as a sign the Federal Reserve may not raise rates four times this year, so stocks rallied on this “glass half full” news.

This underlines the fact that it’s not really the news itself that moves markets but the overall mood of the investing public. The news is just an excuse. The news can be read one way or the other. That has always been the case. The mood in May has turned positive. Maybe it’s the weather. Maybe it’s taking action in Iran and Korea. Lately, I’ve read three books on Socionomic theory edited by Robert Prechter, showing that the social mood determines the outcome of market trends more than the nature of any external events.

Here is a table of how we think in terms of external causality (the news) instead of Socionomic causality:

 

When I saw that line “Outraged people seek out scandals,” I couldn’t help thinking of the national media.

There are all kinds of examples of this crazy “what caused the market to rise (or fall) today?” game, but the wildest one in recent years is the fear of the Fed raising rates. Pundits say rising rates will send stocks and gold reeling, but they fail to look at the last Fed rate-raising cycle in 2004-2006, when both stocks and gold soared while the Fed raised rates in 17 consecutive FOMC meetings over a two-year period.

Stocks Fell in Late April Because of Great Earnings (What?!)

The most ridiculous recent case, as I showed last week, was of stocks going down in late April due to great earnings, since it was “peak earnings season,” as if earnings can’t get any better. Yes, they can get a lot better than this! Earnings can keep growing strongly, just not as rapidly as they grew last quarter!

Earnings growth of this magnitude is unheard-of this late in an economic recovery. Earnings this high should guarantee that the current recovery should last at least another two years. Earnings and economic growth this robust don’t just turn down on a dime. They tend to decelerate more gradually over time.

Earnings are up so much that the Price/Earnings (P/E) ratio for the S&P 500 has fallen sharply, even though prices are slightly up for the year-to-date. According to Ed Yardeni, writing last Thursday, May 10, the forward S&P P/E “dropped from a high of 18.6 on January 23 to a low of 15.9 on May 3.”

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

Yardeni adds that “Thanks to Trump’s tax cuts at the end of last year, this weekly measure of industry analysts’ consensus estimates for earnings over the coming 52 weeks has been soaring…” and because these forward earnings estimates have been “soaring,” the forward P/E ratios have been falling sharply.

What’s to explain this negative mood when earnings are soaring? If earnings can’t be any better, then some professional pundits feel that they have to complain about something or they appear Pollyanna-ish. Mark Mobius has enjoyed a legendary 30-year career as global fund manager for Franklin Templeton. He gave interviews on April 23 predicting a 30% market crash and then upped the ante. Nine days later, he saw a 40% market crash! His reasons are fairly vague, but bad news can always grab the headlines.

In his April 23 interview with the London-based Financial News, Mobius said, “I can see a 30% drop. The market looks to me to be waiting for a trigger to tumble.” Asked what that trigger could be, he said, “You can’t predict what that event might be – perhaps a natural disaster or war with North Korea,” but he said that it could be exacerbated by a “snowball effect” caused by algorithmic trading systems.

Nine days later on CNBC, Mobius said, “The catalyst I believe will come from continuing increases in interest rates.” He also reiterated that “any event could also be a trigger.” Pardon me, I’m just an amateur without 30 years of managing funds, but that’s not any kind of serious analysis. It’s like shooting a rifle into the sky. The market knows all about interest rates and North Korea, and both fears have cooled off.

Next time someone asks you why stocks went up or down today, say “Because the mood changed on Wall Street.” That will be more accurate than almost anything you will hear from the talking heads on TV.

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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