Crossing Wall Street Market Review – April 6, 2018
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (Ticker: CWS)
“Whenever people agree with me, I always feel I must be wrong.” – Oscar Wilde
On Monday, it finally happened. For the first time in 443 trading days, the S&P 500 closed below its 200-day moving average. Dun dun duuuun!
Actually, this is a big deal. The 200-DMA is one of those things I file under “Simple Ideas that Actually Work.” The concept isn’t that hard. The stock market is prone to momentum, and I think the 200-DMA is a simple way to gauge how the market is doing relative to its previous trends.
Over the long haul, the market does poorly when it’s beneath its 200-DMA. Let me be clear—I don’t favor jumping ship. In fact, I think this is actually a good time for us, and our strategy. More on that later. But it’s important to understand that this is a different market than the one we experienced over the last several months.
Here’s a good example. In the last two months, guess how many times the S&P 500 has fallen more than 2% in one day? I’ll give you a hint. Six. Now guess how many times it happened in 16 months prior to that? Another hint. Zero. Not one.
This Is a Good Market for Stock Pickers
One metric I like keep track of is the relative performance of the equally weighted S&P 500 versus the market cap weighted S&P 500. The concept is pretty simple. The relationship between the two indexes often tells us how “broad” the market is.
Over the last 16 months, the equal weighted badly lagged the market cap weighted. In simple terms, the big fish have been doing most of the work, while the minnows have been left behind. As a very general rule, stock pickers tend to like the minnows more than index funds or institutional investors. Whenever you hear that it was a bad year for active managers, in all likelihood, that’s a reflection of how broad the market was.
I’m particularly looking forward to this earnings season. Analysts on Wall Street currently expect the S&P 500 to have earnings of 35.64. That’s the index-adjusted number, and it’s a very good one. (Every point in the index is worth about $8.5 billion.) If that estimate is right, then it would represent a 23.7% increase over last year’s Q1. That’s very strong growth, and the final number will probably be even better. Typically, about 60% to 75% of earnings reports exceed expectations. Indeed, on Wall Street, you’re expected to beat expectations.
Obviously, tax reform is playing a big role in the increased expectations. We’ve seen that in several of our stocks, but that’s not the only factor. The business climate is improving. Typically, Wall Street pares back its earnings estimates as earnings season approaches. Not this time. At the start of the year, analysts were expecting Q1 earnings of $33.97. Over the last four months, Wall Street’s estimate has increased by 5%.
For all of 2018, Wall Street expects the S&P 500 to earn 156.13. That’s up about 7% since the start of the year. The current estimate means the index is currently going for just over 17 times forward earnings. Valuation is a tricky game, but I’d call the current valuation elevated, but not dangerous.