Are you a stock market contrarian?
Investor sentiment, a measure of how investors feel about the stock market, is often a contrarian indicator of where the stock market actually ends up going. There’s an entire class of investors who proudly identify as contrarian investors. These contrarian investors look for buying opportunities when investor sentiment is low and look to take profits when investor sentiment is high. There have been plenty of negative headlines about the market in recent months, but DataTrek Research co-founder Nicholas Colas recently compiled a list of reasons long-term contrarian investors may be scooping up stocks despite the prevailing fears.
The labor market is still growing.
One of the first things companies do when they are concerned about their growth outlook is stop hiring. While the most recent U.S. jobs report fell short of expectations, nonfarm payrolls were still up by 155,000 in November. Colas says one of his favorite data sources on the labor market is the monthly Job Openings and Labor Turnover Survey, or JOLTS report. He says the number of Americans quitting jobs, the number of current open jobs and the number of hires suggests U.S. labor market growth may have peaked, but it will likely still be positive in the near future.
The Chinese stock market has stabilized.
One of the primary concerns for U.S. investors is the potential impact that the ongoing trade war with China will have on corporate earnings and stock prices. However, Colas says one look at the Chinese equity market suggests trade war fears may finally be fully priced into the market. From Jan. 1 through Oct. 15, the iShares China Large-Cap ETF (ticker: FXI) declined 14.4 percent. Since that time, it has held nearly steady while U.S. stocks swooned. Colas says the U.S. market may soon follow China in reaching its appropriate value.
U.S. earnings are still growing.
U.S. investors concerned about a potential recession in 2019 should know that, as of now, Wall Street is actually anticipating even more earnings growth in the coming year. Consensus analyst estimates are calling for $176.51 per share in S&P 500 earnings in 2019. Colas says analysts have historically overestimated forward earnings by about 3.5 percent in years that don’t include surprise recessions. After adjusting downward by 3.5 percent, the $170.38 analyst EPS estimate for 2019 is still 4.9 percent above the tax-cut-boosted 2018 EPS of $162.42.
The Fed may no longer be the enemy.
Higher interest rates eat into earning by raising borrowing costs for U.S. companies, and the Federal Reserve in December raised interest rates for a fourth time in 2018. However, the Fed is now projecting only two rate hikes in 2019, down from its previous forecasts for three hikes. The bond market is currently pricing in about a 51 percent chance that interest rates will be at or below their current level by the December 2019 Federal Reserve meeting, suggesting a high probability there will be no more rate hikes for at least another year.
Treasury rates are down.
Yields on 10-year Treasury bonds have dropped from 3.23 percent in early November to below 2.8 percent. Falling Treasury yields are supportive of economic growth, driving capital into equity markets. Colas says the market for the Treasury’s inflation-protected securities is pricing in further declines in interest rates in the near term. When 10-year Treasury rates move significantly higher than 3 percent, the relative safety of bonds tends to attract the capital of stock market investors resulting in earnings multiple contraction for stocks. In other words, stock prices often fall even if earnings remain stable because investors have a viable investment alternative.
The U.S. dollar has stabilized.
According to DataTrek, about 37 percent of S&P 500 revenues come from sources outside of the U.S. Those international revenues take a big hit during periods of a strong U.S. dollar. The U.S. Dollar Index increased from April lows of around 89.40 to an early November high of about 97.50. Since that time, the index appears to have stabilized, trading recently at around 96.3. Colas says a stable dollar would be an earnings tailwind for U.S. companies in 2019, and a weaker dollar would be even more of a growth driver.
There are big IPOs on tap for 2019.
Earlier this month, two of the highest profile startups in the world filed to move ahead with 2019 initial public offerings. Ridesharing giants Uber and Lyft both plan to go public in 2019, and other billion-dollar startups, including Airbnb, Slack and Palantir, are also reportedly mulling over 2019 IPOs as well. Colas says the potential wave of massive 2019 IPOs is a sign that venture capitalists aren’t concerned about the U.S. economy in the near term. Colas says “big-ticket” tech IPOs don’t typically happen in the middle of U.S. recessions, a bullish sign for the stock market.
Top reasons to be a bullish about stocks.
In review, here are the top reasons to be bullish about stocks:
— The labor market is still growing.
— The Chinese stock market has stabilized.
— U.S. earnings are still growing.
— The Fed may no longer be the enemy.
— Treasury rates are down.
— The U.S. dollar has stabilized.
— There are big IPOs on tap for 2019.
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