Your Biggest Investment Risk: Fear Itself
I’m often dismayed by how easily investors are sidetracked by irrational fears. Recent emails to me from readers have expressed anxiety about Joe Biden’s election (he’s a commie-lib!), Donald Trump’s second impeachment trial (it will spook the markets!), or the Federal Reserve’s dovishness (we’ll get hyperinflation!). Might as well add killer asteroids to the list.
Here’s the reality. Biden’s policies are establishmentarian (which is to say, capitalist and investor-friendly). This week’s impeachment trial of ex-President Trump is significant for historical posterity but it means nothing…zip, zilch nada…to Wall Street. And there’s so much pandemic-induced slack right now in the economy, the U.S. central bank is purposely (and wisely) trying to stoke a modicum of inflation to get the growth engine humming.
Put aside unreasoning fear and focus instead on hard data. And on that score, there’s ample good news that justifies a further run-up in stocks.
For fourth-quarter 2020, with about 60% of S&P 500 companies reporting actual results, 81% of S&P 500 companies have reported a positive earnings per share (EPS) surprise and 79% have reported a positive revenue surprise, according to research firm FactSet (the data provider for Investing Daily).
If 81% turns out to be the final percentage, it will tie the mark for the second-highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008.
Climbing the wall of worry…
During the Q4 earnings season, more companies have beaten EPS estimates than average and by a wider margin than average. Wall Street has worried about corporate earnings because of the pandemic, but as surprisingly strong results are posted, investors have climbed this wall of worry.
In aggregate, positive earnings surprises for Q4 have led to a net $39.2 billion increase in earnings (to $362.5 billion from $323.2 billion) for the index since December 3. The financials sector is the largest contributor to this increase in earnings, accounting for about $16.3 billion of the net increase in earnings.
So far for Q4 2020, the blended earnings growth rate for the S&P 500 is +1.7%. “Blended” combines actual results for companies that have reported and estimated results for companies yet to report.
If +1.7% turns out to be the actual growth rate for the quarter, it will mark the first quarter in which the index has reported a year-over-year earnings growth since Q4 2019. On December 31, the estimated earnings decline for Q4 2020 was -9.3%.
As Trump’s impeachment trial got underway in the Senate on Tuesday, the main U.S. stock market indices closed essentially flat. The Dow Jones Industrial Average fell 9.97 points (-0.03%), the S&P 500 slipped 4.36 points (-0.11%), and the tech-heavy NASDAQ rose 20.06 points (+0.14%) to reach a new high. In pre-market futures trading Wednesday, all three indices were in the green.
The new paradigm…
Since the depths of pandemic-induced economic damage last year, we’ve witnessed substantial improvement. In April 2020, the U.S. reached the highest level of unemployment since the Great Depression. Since then, the unemployment rate has steadily declined. However, we still haven’t achieved pre-pandemic normalcy.
Certain types of jobs (especially in technology) have bounced back, whereas low-skilled jobs have not. We’re in the midst of a “K-shaped” economic recovery, characterized by winners and losers in the new paradigm forged by COVID-19.
As of January 2021, the unemployment rate is still 2.8 percentage points higher than it was before the COVID-19 outbreak (see chart).
According to the Bureau of Labor Statistics, the unemployment rate dipped by 0.4 percentage point to 6.3% in January, an (albeit anemic) improvement.
But we have the wind at our backs. Since the end of the second quarter of 2020, many of the pandemic-fighting measures that impeded economic activity have been lifted to varying degrees around the world and throughout the U.S. Accordingly, we’ve enjoyed a rebound in economic activity in recent months.
Notably, the latest government data show that U.S. gross domestic product (GDP) grew by 4.0% (seasonally adjusted annual rate) in the last quarter of 2020 compared to the previous quarter. That puts the U.S. economy above the “ideal” growth rate of between 2% and 3%. Economists consider the ideal rate robust enough to generate sufficient jobs, but not so fast it fosters inflation or an asset bubble.
Nearly three-fourths of U.S. GDP is consumer spending and on that front there’s reason for optimism. Retail sales data show that by the end of 2020, consumers had continued their previous spending patterns despite the pandemic.
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