Thursday was another wild day for stocks but forget the noise; let’s look at the facts. First, major indices continue to close at new highs, even when intraday rallies are erased. Secondly, the fundamental news continues to be impressive. Even recent pullbacks in certain data points are only natural when many are at coming down from levels not seen in more than a decade.

Earnings Update

Well, 24% of S&P 500 names have reported, and financial results have been on fire, but have they been good enough?  The market is in the midst of the kind of rally that must be justified daily; even then, the chorus of bears and doubters will roar their disapproval and their predictions of doom. 

The fact is that most have been standing on the doom-and-gloom soapbox for the 20,000 points on the Dow. It is of no consequence because they are always treated like Nostradamus when the market crashes.

That being said, this market has enjoyed one of the best stretches in history, especially when measured against the backdrop of zero volatility. For many investors, it just doesn’t feel right when you expect equity futures to be higher, and stocks to bolt out the gate each morning like thoroughbred racehorses. 

I understand that part. To be sure how markets act during short-term stretches can be influenced by many things, often having nothing to do with actual business fundamentals or the economy.  That’s why this earnings period is so critical. Numbers and guidance must be robust; thus far, they have been. 

Top-Line

I noted coming into this earnings period that my focus was on the top-line. Indeed, revenues have beaten the Street 81% of the time at a blended rate above the historical average. Top-line momentum is a great proxy for the economy and consumer confidence. 

Bottom-Line

The earnings picture is just as impressive as the top-line according to FactSet data. In yesterday’s session, 76% of S&P 500 beat the Street with a growth rate of 12%, well above the historical average. 

After the close, Starbucks (SBUX) posted results that beat on earnings but came up short on revenue and comparable sales and that stock is under pressure.

Overbought?

While economic fundamentals are amazing (both domestically and outside the United States), many are calling for a pullback based on equity valuation.  There are countless ways to assess value, but the metric most often sighted is the price-to-earnings (P/E) ratio.

The P/E ratio can be read looking forward 12-months which is the one I like in part because the market is a forward-looking barometer and harbinger of the future developments. On that note, the current Forward price-to-earnings (P/E) ratio is 18.4, which is well above the al average of 15.9, but it is nowhere near levels associated with market crashes.

On the other hand, the 12-month trailing P/E ratio is at the point that signaled the great tech crash of 2001.  It’s not something I dismiss out of hand, but all of this gets me to circle back to the underlying economy and economic momentum that is only going to gain strength near-term. 

Shaking Out the Weak Hands

So, what’s up with the extra volatility?  I think this is a deliberate attempt to scare investors out of the market. As fresh money comes into equities, there are powerful folks who pull strings, and they understand how to manipulate the emotions of unconfident people who have waited a long time to jump into the fray.

Knowing the psychology of buyer’s remorse and also knowing a large swath of people on the sidelines are going to dive in at Dow 30,000. Right now is the time to shake out weaker hands, hence the wild gyrations this week.

Hold the Line

Obviously, markets go up and down, but I continue to caution you not to be shaken out of the market.  Take profits when individual stories change; more importantly, take losses for that same reason. However, don’t allow the masters of the universe that have largely missed this rally buy the dips created from shaking you out of the market.

Today’s Session

This morning, President Trump spoke at the World Economic Forum at Davos, Switzerland pitching his America First agenda and laying out its benefits to the world.  Essentially, it was a sales pitch for the world to invest in the greatest economy that just recently regained its stride.  The fact is the world populated America throughout history for a better life of riches, unimaginable otherwise.

Some of the accolades:

• “Extraordinary Strides”
• “Waterfall of post-tax bonuses”
• “America is the place to do business”

Gross Domestic Product

This morning, the GDP release came in short of expectations at 2.6%, but there is a good chance future revision could land the final number at 3%.  That said, individual components didn’t disappoint. 

Personal Consumption Expenditures 3.8%

• Goods
• Durable 14.2%
• Non-Durable 5.2%

Final Sales 3.2% (best since 3Q14)

Final Sales Domestic 4.3% (best 3Q14)

We’ll highlight key earnings in the afternoon note.

Comments

As always, an excellent well though out piece of insight and guidance. In reference to the 12 month trailing P/E ratio signaling the crash of 2001, there is one HUGE (Trump pun intended, lol) difference to this markets move. Namely 2001 was based on growth WITHOUT earnings in most instances of the tech boom. Today's move is based on earnings growth and we are just getting started, and it is broadly based across manufacturing, tech, services and almost all areas of the economy! Thank God. ray on 1/26/2018 9:44:04 AM

There needs to be a review of the seasonal adjustment factors being used at the Commerce Department. The 4th quarter, independent of party of the Administration, is always very weak. Are The actual values before seasonal adjustment as weak as the reported number? David Harvison on 1/26/2018 12:00:15 PM

I agree with your comments about people spending more because they feel good about the future. I also noticed, due to one of my sins, the traffic at the casinos in Atlantic City is heavy. I used to walk in and sit down and play but now I have to walk around looking for a seat. This could mean more dealers being hired, cocktail waitress, etc. Good outlook for the future. Joe Joe Thummel on 1/30/2018 11:22:31 AM

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