(Bloomberg Opinion) — The phrase “hope for the best and expect the worst” is synonymous with cautious optimism. But with corporate earnings season kicking off, stock investors are forgetting the part about being cautious, setting themselves up for a big disappointment if things don’t break just right.
One explanation for the S&P 500 Index’s 15 percent gain this year — despite a steady deterioration in earnings estimates to the point where analysts now expect a 1.9 percent decline for the first half of 2019 — is that investors clearly see much better times ahead. That can be seen in the valuations, with the S&P 500 trading at about 17 times this year’s expected earnings, higher even than at the start of 2018, when profits were expected to soar some 20 percent. But earnings in the second half are only expected to rise 5.5 percent, which is down from an earlier estimate of 8.3 percent. This is all to say that stocks are priced for perfection and that the risks have shifted to the downside, especially if the outlook from corporate executives fails to meet investors’ lofty expectations. Here’s another way of looking at it: Bloomberg News reports that the share of S&P 500 members trading above their 50-day moving average is floating around its highest levels of any time in the last five years. At the same time, the portion with 14-day relative strength indexes above 70 — a level indicating overbought — is above the one-year average.
And while the indicators’ positive territory supports a longer-term advance, “the fact that neither has made a new high with stock prices suggests a rocky period for equities may be likely during the upcoming earnings season,” Bloomberg Intelligence equity strategist Gina Martin Adams noted. Don’t say you weren’t warned.
BOND BEARS CAPITULATE — AGAIN
It seems like such a long time ago, but it was only last fall when 10-year Treasury yields broke through the psychologically important 3 percent barrier to reach as high as 3.26 percent. Many market pundits declared the start of a long, painful bear market in bonds that would send yields even higher. Of course, that didn’t happen, and yields have since fallen back, to around 2.50 percent on Thursday. Now, many of those same pundits don’t expect yields to crack the 3 percent barrier in the next two years, based on the latest forecasts of economists and strategists in a Bloomberg News survey released Thursday. That marks a huge reversal from November, when yields were expected to rise to 3.55 percent as soon as mid-2020, compared with 2.80 percent in the latest survey, which was down from 3 percent in last month’s poll. The reason this is important is because the big sell-off in stocks in the last two months of 2018 was partly blamed on higher yields. The Federal Reserve eventually recognized this and quickly turned dovish in early 2019 out of fear that a collapsing stock market might cause a marked slowdown in the economy, or even a recession. One side benefit is lower home-loan rates. Freddie Mac said Thursday that the average rate on a 30-year mortgage stands at 4.12 percent, down from last year’s high of 4.94 percent in November.
ALL GOOD THINGS COME TO AN END
It didn’t get a lot of attention, but emerging-market stocks rose for 10 consecutive days in the period ended April 10 in a pretty remarkable string of uninterrupted gains. Over that period, the MSCI Emerging Markets Index rose 5 percent. But nothing lasts forever, and when emerging markets reverse, they do it in a big way. On Thursday, the MSCI index fell as much as 1 percent, led lower by declines in the stock markets of Brazil, Russia and Turkey. Consider this the pause that refreshes. Emerging markets came out relatively unscathed in the International Monetary Fund’s global update released this week. The organization expects growth in these economies to slow just 0.1 percentage point this year to 4.5 percent, compared with the 0.3 percentage point slowdown in advanced economies to 2 percent. The IMF’s forecasts for China, India and Brazil were either left unchanged or boosted slightly. Plus, at 13.2 times earnings, emerging-market stocks are a relative bargain when compared with the 17 times earnings that stocks globally are fetching. It also doesn’t hurt that analysts from banks including HSBC Holdings Plc, Morgan Stanley and Goldman Sachs Group Inc. are increasingly confident that China, the world’s second-biggest economy, is finding its feet after a rocky start to the year, according to Bloomberg News’s Enda Curran.
ANIMAL SPIRITS ARE ALIVE
Just because cryptocurrencies have yet to recover from their stunning collapse in the wake of the highs made in late 2017 doesn’t mean they aren’t useful. In fact, many market participants look to their daily fluctuations and other developments as a proxy for broader risk sentiment. And based on some recent action in the crypto market, animal spirits seem to be alive and well despite widespread concern about a slowdown in the economy. The best example may be the budding revival in crypto coin offerings. But instead of marketing coins directly to investors through an Initial Coin Offering, Bloomberg News’s Olga Kharif reports, companies are relying on crypto exchanges to serve as underwriters, review the projects and offer tokens to vetted customers in a a method dubbed Initial Exchange Offerings. About $180 million has been raised in 23 offerings, with most taking place since February, according to Kharif, citing crypto data tracker CoinSchedule.com. Now comes word from Bloomberg News that that Harvard University’s endowment is backing Blockstack Inc., which seeks to hold a $50 million digital-token offering. Harvard Management Co. and two other investors have already purchased about 95.8 million of the company’s tokens valued at about $11.5 million, according to a regulatory filing.
THE HOG MARKET IS NOW A BULL MARKET
After a brief respite at the start of the week, the hog market resumed its remarkable rally. Pork prices gained as much as 3.45 percent Thursday, bringing its gain since late February to 67 percent. Hogs rose on Thursday even though the broad Bloomberg Commodity Index fell as much as 1.12 percent. U.S. hog farmers are the beneficiary of a proliferation of African swine fever on farms in East Asia. In fact, China just made its biggest-ever purchase of American pork, buying 77,700 metric tons in the week ended April 4 even as tariffs imposed on American hogs remain in place, according to Bloomberg News’s Isis Almeida and Dominic Carey, citing data released Thursday by the U.S. Department of Agriculture. The sale was the equivalent of about 45 percent of last week’s American production. Weekly pork export sales were “astonishingly huge,” said Dennis Smith, a senior livestock analyst and broker at Archer Financial Services. “Anyone that had any questions about the situation in China should take note. I calculate the Chinese portion of exports the equivalent of about 1.1 million pigs.” There are broader implications for the price of food in general. Meat prices — whether it’s chicken, beef, seafood or even fake meat — are likely to rise as supplies around the world may be redirected to China to satisfy the country’s deficit in protein, Bloomberg News reported, citing a new report from Rabobank.
U.S. consumer confidence rebounded for the second consecutive month in March, as measured by the University of Michigan’s monthly survey, after dropping in January to the lowest level since 2016. The strong comeback in the stock market surely helped goose confidence the last two months, but the reading for April could be a downer. Although the median estimate of economists surveyed by Bloomberg is for the sentiment index to be little changed at 98.2 for April when it’s released Friday, compared with a reading of 98.4 in March, there’s been a lot of concern about the impact of declining tax refund payments on consumer psyches. As of April 5, Internal Revenue Service data show that $206.1 billion has been refunded this year, down 2.9 percent from the same period of 2018. This is likely to be a shock to many consumers, who were told that tax reform would lower their obligations and therefore increase their refunds. The same IRS report showed that the total number of refunds were down 2.2 percent from a year ago.
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Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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