I spent the long President’s Day weekend with my family in Disney World. It was the first time that my four-year-old granddaughter Cecelia (a.k.a. “CeCe”) attended the theme park. The park’s staffers are trained to say “Have a magical day” whenever they greet visitors. Cece had a magical weekend, and so did the rest of my family. The weather was great, and my wife wisely obtained FastPass+ reservations for most of the rides. We particularly enjoyed a trip around the world on Disney’s flight simulator, Soarin’.
Back on Earth, stock investors have enjoyed a magical bull market since March 2009. It was particularly magical during 2017, when the S&P 500 rose 19.4%. Such a double-digit return is quite extraordinary for an aging bull market going on nine years old in 2018. The magic seemed to stop abruptly when the S&P 500 plunged 10.2% over 13 days from late January through early February. I believe that the latest selloff marked the fourth correction in this bull market, not the beginning of a bear market. The economic fundamentals remain bullish:
(1) 2018 earnings estimates. S&P 500 earnings estimates for 2018 have been soaring during the current earnings season. Industry analysts have been getting guidance by corporate managements on the very positive impact of the Tax Cut and Jobs Act (TCJA), enacted at the end of last year, on their earnings. I have been keeping track of these estimates on a weekly basis. Over the past nine weeks since TCJA was enacted, the 2018 consensus earnings estimate for the S&P 500 has increased by $11.21 per share from $146.26 to $157.47. That’s a 7.7% increase.
(2) Boom-Bust Barometer. My Boom-Bust Barometer (BBB) is simply the CRB raw industrials spot price index divided by initial unemployment claims. It is a great coincident indicator of the US business cycle. It soared into new record-high territory in recent weeks. It did so as the CRB index rose to a new cyclical high following its freefall from the second half of 2014 through the end of 2015. At the same time, weekly initial unemployment claims have dropped to their lowest levels since March 1973.
(3) Weekly Leading Index. I have devised a Weekly Leading Index (YRI-WLI) that is an average of our BBB and Bloomberg’s weekly Consumer Confidence Index (WCCI). It is highly correlated with the index compiled by the Economic Cycle Research Institute. My WLI is based on an open-source formulation, while theirs is based on a secret sauce. Both have been rising in record-high territory in recent weeks.
The YRI-WLI is soaring because the BBB is doing so, and so is the WCCI. Consumers have lots of reasons to be overjoyed with the unemployment rate at a cyclical low and many of them bringing home paychecks boosted by tax cuts. The WCCI is the highest since February 2001.
(4) Forward earnings. Interestingly, the S&P 500 forward earnings is highly correlated with both the Boom-Bust Barometer and the YRI-WLI. The earnings measure is a time-weighted average of analysts’ consensus expectations for S&P 500 earnings during the current year and the coming year. It’s been soaring ever since the end of last year when the TCJA slashed the statutory corporate tax rate. The forward earnings of the S&P 500/400/600 have increased by 9.5%, 8.3%, and 10.4% since the passage of TCJA.
(5) Stock prices. Given all of the above, it’s no wonder that the S&P 500 stock price index is highly correlated with the YRI-WLI. The latter, which is up 9.4% y/y, remains bullish for the former.
