Bulls & Bears – Second Quarter 2018 Edition
Since we last published the chart below in April of this year, conditions suggesting a continued rise in equity prices persists. As reported by FactSet, analyst’s earnings estimates for the 2nd quarter of 2018 have risen by 3% during this period: This has not occurred since 2010 and is significant because usually, earnings estimates are adjusted lower as the year progresses.
To gain clarity in estimating valuations and equity price direction, years ago we developed an analysis and method for assessing Equity valuations: The chart below is the result of our proprietary ** guessing apparatus.
Chart: Courtesy of Dominguez & Jones Wealth Management Group, LLC.
So, if the RED line sits under the BLUE line equity are likely to decline according to this method. The opposite is true if the Red line is above the Blue line. How accurate is this method? There are very few things that are absolute; this is not one of them. However, the inflection points, when the lines cross, typically, is indicative of a change in the character of the equity markets, we believe. So what is it telling us?
In our opinion, equity markets are bullish for the foreseeable future.
In the short-term, however, we remain cautious; the rhetoric on tariffs and the upcoming election are causing a little short-term uncertainty, as such, we do not believe stocks are poised for the next leg up until these issues near resolution. We do not know how long the current consolidation will be or if the current correction will extend. Deep downdrafts occur during recessions, in our experience, not during economic expansions. To wit, The Federal Reserve Banks of Atlanta’s GDPNow, forecast estimates 2nd quarter GDP growth of just over 4%.
And remember, please, “Forecasts create the mirage that the future is knowable.” – quote, attributed to Peter Bernstein.***
The Bull in the longer term, the baby Bear for now.
Our portfolios and strategies reflect overweighted positions in Domestic Equities.
Carlos Dominguez, CFP® – Portfolio Manager, RJ
**The advisors at The Dominguez and Jones Wealth Management Group. LLC., developed a proprietary analysis and method based on earnings, actual and estimated as well as interest rate levels to ascertain possible inflection points in the US Equity Market.
*** Peter Lewyn Bernstein (January 22, 1919 – June 5, 2009) was an American financial historian, economist, and educator whose development and refinement of the efficient-market hypothesis made him one of the country’s best-known authorities in popularizing and presenting investment economics to the general public
Chart Sources: The S&P Indices and S&P Global Co. – Earnings, actual and estimated as well as S&P historical prices. The Federal Reserve Bank of St. Louis for Interest rate data.
Earnings Growth Data Source – FACTSET https://insight.factset.com/second-largest-increase-in-sp-500-eps-estimate-since-2010-for-q218
Sources are being provided for information purposes only. Raymond James is not affiliated with and does not, authorize, or sponsor any of the listed sources. Raymond James is not responsible for the content of any source or the collection or use of information regarding any source’s users and/or members. Past performance may not be indicative of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is considered representative of the U.S. stock Market. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Any opinions are those of Carlos Dominguez and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor recommendation. The information has been obtained from sources considered reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.