Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: Both Houses of Congress are currently racing to come up with a workable tax plan right now. As you noted, failure to do so could serve as the trigger for the much-prolonged market correction. If Congress isn’t able to get a tax plan done by the end of the year, would that be more of a market sentiment problem or would it have longer-lasting implications for the economy and stocks?
Stovall: I think it’s more of a market sentiment problem, meaning that a tax cut has been factored into investor optimism, but I don’t really think it’s been factored into earnings. So, if we don’t get the tax package, then I think the market is overvalued by about 10% right now because it’s gotten ahead of itself in anticipation of it. However, since so many other factors regarding the economy are still in an upward trajectory, I don’t think that it’s going to lead to a severe correction or a bear market just because the economy continues to do well. So yes, it is something that will affect investor sentiment, but not throw us into a new bear market.
EQ: Wednesday marked the one-year anniversary of the election of President Trump. In this week’s Sector Watch, you examined how the market has performed the election. Where does he rank in that regard?
Stovall: The president who had the best performance through election day through a year later was President Kennedy with a 27% first-year gain. Trump is essentially tied for second with George H. W. Bush right now with 22%. So, it’s a very strong showing but certainly not the strongest.
EQ: We’ve discussed before that every Republican president since Teddy Roosevelt experienced a recession during their first term in office, but as you covered in this week’s report, history might suggest that this market may have a bit more room to run. Why is that?
Stovall: Well, it’s because the economy has been growing at such a low rate of speed. The trajectory of economic expansion has been a lot lower than prior expansions, and as a result, it had no jackrabbit start in which to lose precious fuel. So, we’ve had this economic expansion, which is now more than 100 months old and more than twice the average length since 1900, yet because we are not dealing with an increase in inflation, massive wage increases, etc. as productivity does not seem to be improving, I would tend to say that we’re about a year away at least from having an economic recession. But, watch the yield curve, and should the yield curve go negative (when short-term rates become higher than long-term rates), then that traditionally signals that a recession is around the corner.
EQ: Earnings season is looking start winding down now. After the initial softness out of the Financials sector, the rest of the S&P 500 groups seemed to really come on strong. How are third quarter earnings shaping out now?
Stovall: Well, they’re shaping up to register the 23rd consecutive quarter in which actual results beat end-of-quarter estimates. Right now, earnings are expected to be up 6.8% versus the 5.0% that was expected on Sept. 29. So, it’s not as good as the long-term average beat of 3.5 percentage points, but certainly Wall Street will take it because earnings continue to come in above expectations.
EQ: With the Q3 results coming in, full-year guidance looks to have moved back to double-digit growth for 2017. Looking ahead, what has corporate guidance told us about Q4 and for 2018?
Stovall: Well, 2018 looks like it’s going to be up about 11%, and each one of the quarters for next year is expected to see double-digit gains. So, right now that’s basically five quarters out, and so a lot of optimism can be built into those numbers, but I think that’s another reason why investors are not going to be looking for a recession or bear market since earnings continue to advance and revenues are being supportive. Revenues are expected to be up 6% this year and by a similar amount next year. Also, we’re dealing with a global economic expansion where global GDP is expected to be up close to 4% versus the close-to-3% rise anticipated for 2017.
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