“Danger always strikes when everything seems fine.” From the movie “Seven Samurai” (Akira Kurosawa, director)
OVERVIEW AND CONCLUSION
American stock indices inspire an assortment of competing stories regarding them, including reasons for their past, present, and future levels and trends. Narratives and explanations regarding a broad “national” stock marketplace indicator such as the S+P 500 often involve those of equity weathervanes elsewhere. Discussions of interest rates, currencies, commodities, and other financial indicators may interrelate with stock marketplace analysis. These tales frequently indicate the extent to which given marketplace domains converge and diverge (lead or lag) with each other.
Many descriptions and analyses regarding broad benchmarks such as the S+P 500 and Dow Jones Industrial Average appear relatively unique to the United States. However, economic regions and marketplaces around the world increasingly have intertwined during the course of globalization in recent decades.
Therefore the directional travels (bull and bear adventures) of America’s “overall” stock marketplace increasingly have tended to parallel (converge with) stocks of other significant advanced countries and regions. In the increasingly intertwined global economy, trends of emerging marketplace stocks “in general” have interrelated with and often (but not always) resembled those of leading advanced nations.
Various advanced nation and emerging marketplace stock indices achieved very important highs “together” early in first quarter 2018. However, in recent months, probably beginning around the end of first quarter 2018, the generally bullish trend of the S+P 500 and other noteworthy US equity marketplace benchmarks have diverged substantially from the bearish trend of emerging marketplace stocks. Climbing US interest rates and a renewed rally in the broad real trade-weighted dollar, plus increasing trade war rhetoric, encouraged the relative and overall feebleness in emerging marketplace stocks.
In addition, the S+P 500 and other US stock indices have diverged somewhat from those of other key advanced nations, though less substantially than relative to emerging stock marketplace realms. Nevertheless, important European and Japanese stock arenas currently remain under their January 2018 highs (and mid-May 2018 ones). The failure of these overseas stock battlegrounds to achieve new highs alongside American ones, when interpreted alongside the decline in emerging marketplace stocks (and in relation to other economic variables), further hints that American stock benchmarks probably are establishing an important price peak around current levels.
In this context, bearish indicators for American equities include the longer run trend of rising US interest rates (note the yield lows of July 2016 and September 2017), mammoth global debt totals, expanding American federal government budget deficits (aided by tax “reform”), and the rally in the broad real trade-weighted US dollar above a critical height. The Federal Reserve and other key central banks are not displaying signs of further easing; instead, the bias is toward tightening (even if only at a rather glacial pace). Also, United States stock marketplace valuations arguably are high by historical standards. A global trade war (tariff fights), or at least noteworthy skirmishes, is underway.
Populist pressures have not disappeared in America or elsewhere. Economic, political, and other cultural divisions in America are significant. What if the US mid-term elections this autumn return the Democrats to power in the House of Representatives (and perhaps the Senate as well)? Concerns about the quality of US Presidential leadership remain widespread.
The US tax “reform” legislation enacted in December 2017 has been a critical factor in creating the price divergence since around late first quarter 2018 between American stock price benchmarks and those elsewhere. The US corporate tax cut translated into higher reported earnings for American companies and thereby helped to rally American stocks. Other leading countries around the globe did not enact a similar generous gift for their corporations. Moreover, America’s tax reform likely further encouraged share buybacks by US corporations.
The second quarter 2018 blended earnings growth rate for the S+P 500 was 25.0 percent year-on-year (FactSet, “Earnings Insight”; 8/31/18). Thomson Reuters estimates S+P 500 2Q18 earnings soared 24.8pc (“S&P 500 Earnings Scorecard”; 8/28/18). Thomson Reuters data notes that 1Q18’s earnings likewise skyrocketed, up 26.6pc year-on-year (compare 4Q17’s boost of 14.8pc and 3Q17’s 8.5pc rise).
Both FactSet and Thomson Reuters forecast significant year-on-year earnings increases for the S+P 500 over the next two quarters of 2018. FactSet says analysts are projecting earnings will climb 20.0 percent in 3Q18 and 17.4pc in 4Q18. Thomson Reuters puts year-on-year earnings growth at roughly similar levels, with 3Q18 ballooning 22.3pc and 4Q18 up 20.3pc.
However, the rate of earnings increases slows in 2019. FactSet states earnings growth in 1Q19 will be 7.2pc year-on-year, with 2Q19 stretching up 7.5pc versus 2Q18. Thomson Reuters places 1Q19 growth at 8.2pc year-on-year, with that for 2Q19 up 9.3pc.
Perhaps the wonderful US corporate earnings of first half 2018 will be followed by the impressive earnings forecast for the balance of 2018. However, if notable shortfalls in actual earnings relative to such lofty current profit expectations occur, that probably will worry many stock bulls. Going forward, if forecasts for first half 2019 earnings for the S+P 500 are cut relative to current expectations, will that make S+P 500 bulls (“investors” and others) fearful. After all, the currently anticipated (conjectural) calendar 2019 earnings growth already dips significantly from those of calendar 2018’s quarters.
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Stock Marketplace Maneuvers- Convergence and Divergence (9-4-18)