Good Morning,


Hey, watch out – October is almost here.  And, believe it or not, Christmas is 90 days away.  Ouch.  Stunning how fast 2017 has flown by – even as the airwaves are full of things we are supposed to worry about.


With Q3 around the corner as well, let’s check in with data for a quick summary of the latest stats.  By the way, they are good.  FactSet tells us this:


Earnings Growth: For Q3 2017, the estimated earnings growth rate for the S&P 500 is 4.2%. Eight sectors are expected to report earnings growth for the quarter, led by the Energy sector.


Earnings Revisions: On June 30, the estimated earnings growth rate for Q3 2017 was 7.5%. Ten sectors have lower growth rates today (compared to June 30) due to downward revisions to earnings estimates, led by the Energy sector. (normal M.O. as covered before)


Earnings Guidance: For Q3 2017, 75 S&P 500 companies have issued negative EPS guidance and 43 S&P 500 companies have issued positive EPS guidance.


Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.7.


Earnings Scorecard: For Q3 2017 (with 6 companies in the S&P 500 reporting actual results for the quarter), 4 companies have reported positive EPS surprises and 4 companies have reported positive sales surprises.


As to surprises and guidance, here is the most interest part of the latest data from FactSet:


“A record Number of S&P 500 Companies Have issued Positive Revenue Guidance for Q3”, but it is still early.


Recall, we should expect negative EPS guidance as well given the storms so when a big deal is made of same, try hard to look beyond the near-term.


Note that so far, by sector, companies in the Information Technology, Health Care, and Consumer Discretionary sectors account for 39 of the 43 companies that have issued positive EPS guidance for the third quarter.


From Thomson data below we can also see that projections moving forward continue to be steady into 2018/2019.


Note the red mark on the low point – Q3 of 2017.  I say low point as much will be heard about the “falling rate of growth.”


We touched on this back in the Q2 reporting season as a warning.  The growth rate appears slower because last year at this time (marked in blue), Q3 of ’16 marked the return to earnings growth after the collapse in the energy sector which masked growth for the entire rest of the economy.


The point?  It’s a numbers game – don’t get sucked in.  Rates of growth return to nice levels after the red dot – meaning 90 days from now.  Even bigger?  This covers no tax law changes.


IF we can actually get DC to finally accomplish something, look for every 1% reduction in the corporate tax rate to mean somewhere between $1.80 and $1.95 more dropping to the bottom line of annual S&P 500 earnings.

Changing Gears – Big Picture


How Big Is The World Economy Today?


With all the hand-wringing so many experts project upon the masses, supported by the non-stop media chatter, most may overlook just how big everything has become during these “perilous times.”


Let’s take a look with some help from a couple great charts from Mr. Grannis:

The latest Fed data shows that household net worth rose by $8.2 trillion (a gain of 9.3%) over the most recent 12-month period.  This came from a combination of a $6.6 trillion gain in financial assets and a $1.9 trillion rise in the value of real estate holdings. Interestingly, the latter category is $2 trillion more valuable than at the peak of the housing bubble in 200!


Some good news inside the data?  With household debt rising by less than $500 billion in the past year, household leverage (total debt as a percent of total assets) has now fallen by one-third since the all-time high in 2009.


Here is the thing though – both the global economy and global financial markets are huge.


Indeed, far larger than most people realize.  Let’s review some facts:


Global GDP is roughly $80 trillion (about four times the size of the US economy).


The chart above shows you that the world’s economy supports actively traded bonds and stocks worth $132 trillion.


About 40% of that total are US-based.


Dr. Ed reminds us that there’s really nothing unusual about these data as a typical US household has a net worth (stocks, bonds, savings accounts and real estate) equal to about roughly three times its annual income.


But the Fed is Raising!


Even though assets and earnings continue to expand at relatively normal long-term ramp rates overall, the fear remains that the Fed will kill it all with rate increases.  Let’s deal with the Facts:

The chart above shows credit spreads in the US are at relatively low levels (“normal” swap spreads are 15-30 bps or so). That implies that systemic risk is low, liquidity is plentiful, and the economy is unlikely to throw a wrench into the sales and profits of the US economy’s businesses.


For the bond boys and policy wonks, this suggests that conditions are expected to be good, and profits are expected to rise. The data also suggest the Fed is years away from creating a liquidity squeeze, which could only be precipitated at this point by a massive reduction in bank reserves.


There is more to relive your concerns about rates:

The chart above is important – and very helpful when reviewed from a larger perspective. It shows that every recession in the past 60 years has been preceded by a substantial tightening of monetary policy.


How does one know?  Monetary policy is tight when the real Fed funds rate (blue line) is at least 3-4%, and when the Treasury yield curve (red line) is flat or inverted.


And now?   We are very, very likely years away from seeing those conditions.


The proof is in the pudding.  Note bond levels have returned to pre-Fed-balance-sheet-shrinking-announcement levels from last week.  (Read:  fear of taking risk remains very high):

Broken Record?


This week is likely spent anticipating anything nasty out of Korea.  After that, expect a ton of attention on the pace of any negative (storm-related) announcements.  The roadmap – if it unfolds – likely looks something like New Orleans from years ago.


The rebuilding process is what business will focus upon instead – so consider warnings as generally short-term events.


Slow and steady wins this race friends.  No way around that.


As Ken likes to say, we need to remain focused on demographics – not economics.


The former creates the latter.


While the world around you frets…stand tall and remember this:  we are at record highs because we overcame all that we feared before right this moment.


Sure it is tough sometimes – but it was never meant to be easy.


In Summary


The even tougher part we need to wrap our heads around is this harsh reality:


The global economy is changing faster than most can perceive at this stage.


Don’t look for that pace to slow anytime soon.


Even though that can be unsettling at times – it remains a positive.


Worse?  During corrections – which are sure to come – that pace of change is set to continue even faster.


Demographics Rule The Long-Term Game


Planning is critical as always.  Stay focused on the right pitch.  It is early in the game.


The US is set for surprisingly steady growth ahead – with stunning opportunities to unfold for the patient, long-term investor.


Soon, the “dreaded” October crash remarks will be upon us, filling the airwaves anytime we have a down close of more than 100 points or so.


Strong economic data and steady earnings growth is what the long-term investor should instead focus upon.


It is true that many storms are around us, but they always are at this time of year.


The important part?


Long-term currents – not short-term, emotional waves.


Even after the warnings for storm-related delays, Q3 should set more records as the data show above.


In case you missed the New Year, for markets – 2018/19 are the focus now.


One more thing:  Pray for a correction.


Until we see you again – may your journey be grand and your legacy significant.