Economic Insights - November 2018

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Economic Insights

Prior to October 2018, the last real “scares” investors were faced with was August 2015, and the first quarter of 2016. At that time, the long-termtrend for the S&P 500, the 20-month moving average, was in fact broken, BUT it quickly recovered. When faced with stress, we need to step back and look at ALL DATA points around us. Back then, there were two factors that caused us to remain bullish:

First, sentiment was at very low, very depressing levels. Bull markets usually end with euphoric excess. So, proclamation of a “market top” and the end of the bull market just didn’t “fit,” 

Second, and most important, the earnings recession that everyone was worried about wasn’t a recession at all. The ONLY sector that lacked improving earnings back then was Energy. When oil cratered to $26 a barrel, the drag from the energy sector was enormous. 

Today, we continue to have negative sentiment. No euphoric episode is at hand. And, earnings are solid.

This time, the FEAR on the earnings scene revolves around whether earnings growthwill materialize as the analysts expect. Many believe we’ve reached peak-earnings,and this will be followed by an “earnings recession.” But, it’s quite possible that these analysts and market pundits are making the same mistake they did in 2016.

Another assumption is that the slowingglobal economy will then take its toll on S&P 500 earnings. They say the “sugar high” from the tax cuts is over and earnings will retract. But, the last time we heard the term “sugar high” was when the bears were telling us how investors were about to get crushed when QE ended. For the record, QE ended in 2014, when the S&P500 was at 1,800; over the next four years, it rose over 60 percent.

We have been talking about the global situation for months now. It has been labeled as a “sign of concern,” and we concluded that some improvement needs be seen soon. The question is whether, it is just a “a global soft patch” or something that could develop into a more serious situation. In 2016, we faced the same concerns, and it was then determined that the world would soon be in recession.

We all know what happened in 2016. Some panicked, others waited. The latter...

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