Another Record High For Stocks
Stocks barely increased on Tuesday, but it was still another record high. S&P 500 is on a 5 day winning streak. That’s its longest winning streak in a month. S&P 500 is now up 27.35% year to date. CNN fear and greed index increased 3 points to 85 which is extreme greed. 14 day RSI was at 71.83 as of Monday’s close.
It slightly increased on Tuesday likely with the market’s 3 basis point rise. And, it got into the mid to high 70s in November and never went below 50 since.
A mini correction brought stocks to less extreme levels on a short term basis, but the S&P 500 is higher than it was las month. If stocks are blowing past the usual correction sign posts, the next step is to look at valuations. Stocks aren’t in a bubble, but they aren’t cheap.
As of December 13th, the S&P 500’s forward PE multiple was 17.8. I’m guessing it’s close to 18 right now. 5 year average is 16.6. Stocks aren’t at tech bubble heights. But if you’re predicting much more upside in 2020, you’re either saying stocks will reach extreme multiples. Or earnings growth will be much stronger than expected.
Coming out of a recession earnings estimates are too low. They were also too low after the tax cut was passed. 2019 certainly wasn’t a recession, but it was a weak period. It’s possible analysts became too cautious. Meaning earnings estimates won’t fall as much as usual and firms will beat those estimates.
Even still, expecting 10% earnings growth when expectations are for 5.5% growth is aggressive. In my prediction for 3% to 5% gains next year, I see earnings growth of 4% to 6% and modest multiple compression. Stocks usually don’t return much when manufacturing PMIs are high which explains the weak 2018.
ISM PMI will go above 50 in Q1. Many expect a slightly stronger year than 2018 because the Fed isn’t hiking and growth shouldn’t be falling.
FedEx Misses Earnings Estimates & Its Stock Tanks
FedEx reported $2.51 in EPS which sharply missed estimates which were $2.76. The firm had revenues of $17.32 billion which missed estimates for $17.58 billion. It’s not a good sign for the economy that FedEx missed on the top and bottom line.
As you can see from the chart below, the year over year change in FedEx’s stock is correlated with the ISM manufacturing PMI. This report caused its stock to fall 6.81% after hours. It’s one of the few stocks that isn’t up year to date.
FedEx lowered its guidance again as it expects full year earnings to be between $10.25 and $11.50 per share instead of $11 to $13. Consensus estimate was for $12.03 which is now above the high end of the guidance range. The firm is in a bind.
CFO Alan Graf Jr. stated, ″Our revised guidance reflects lower-than-expected revenue at each of our transportation segments and higher-than-expected expenses driven by continued mix shift to residential delivery services.” Higher expenses and mix shifts aren’t exactly problematic signs for the economy.
However, the firm did blame global economic conditions and the loss of business from “a large customer” which is Amazon.
The economy isn’t doing that well, but this weakness is mainly company specific. I wouldn’t bet on a weaker manufacturing PMI in the next month because of this bad report. 60% of the firm’s margin decline was caused by the cost of the launch of 7 day residential deliveries via FedEx ground, online holiday sales shifting to fiscal Q3, and the loss of Amazon volume.
Previously, FedEx only delivered every day near the holidays. It’s no surprise that FedEx’s earnings were hurt by the timing of Thanksgiving. Question is if the seasonal adjustment to the retail sales report properly measured this change.
Amazon digging into FedEx has nothing to do with the economy, but is bad for FedEx shareholders. This week Amazon issued a temporary ban on 3rd party sellers using FedEx ground and home delivery for Prime orders. Amazon is delving into deliveries itself which means FedEx is a competitor not a supplier.
Democratic Debate Is Back On
The Democratic debate on Thursday will happen. A deal was made with the food service union.Latest polls were bad for all Democrats as nationally President Trump beat each candidate according to USA Today/Suffolk. Biden had the best performance as he lost to Trump by 3 points.
Good news for Biden is that this is only the 3rd poll since this March that has showed him losing to Trump. His average margin of victory over the President is 6.2 points. This polling firm also measured the Democratic primary. It showed Biden up by 9 points over Sanders. He’s up by an average of 8.4 points in the recent polls.
Review Of Tuesday’s Action In Markets
Nasdaq was up 0.1% and the Russell 2000 was up 0.46%. It’s now less than 5% from its record high. Even though stocks increased, the VIX was up. It rose 0.15 to 12.29. There’s very little room for it to fall. I’d caution against going short the VIX here.
Financials and the utilities were the best performers on Tuesday as they rose 0.49% and 0.24%. As you can see from the chart below, the S&P 500 financials index hit a new record high for the first time since 2007. In that period, the S&P 500 is up 118.64%. This is just like how it took over a decade for the Nasdaq to hit a new record high after its collapse in the early 2000s.
Worst performer was real estate which fell 1.16%. Real estate didn’t like the rise in yields as the 10 year yield is now at 1.87% and the 2 year yield is at 1.62%. 10 year yield’s major resistance is 1.94%. I’m guessing it will break through that in the next few weeks. There is now just a 50.2% chance of a cut in all of 2020. That’s in line with the prediction for no action from the Fed next year.