US share-market: W&D sees wobbles
'Sell in May. And go away (on vacation)' is the an old stock-market saw, along with the very clever: 'buy low and sell high'. May is coming.
Readers will recall that on 12-Feb the S&P500 (the best index for measuring the US stock-market) was down some 9% since 31-Dec-15. But has since recovered to be about +1% for 2016.
W&D's problem with the market rising is that is that company profits are falling.
And, as you can see, it's not only the US energy sector that is feeling the pain.
At 31 December, analysts expected US company profits (excluding energy companies) for the March quarter to grow at 4%. In a turnaround almost as big as Chief Sitting Turnbull's fall in popularity, the company analysts have now changed their mind - company profits are now expected to fall by 4%.
The March quarter will therefore be the third consecutive quarter of negative profit growth , the longest such period since the end of the GFC.
The W&D logic is obvious: if share Prices go up and Earnings (i.e. profits) go down, then P divided by E must go up. An increasing P/E worries W&D. The forward-looking P/E of the US market is now 16.9, 17% higher that the long-term average. Irrational? Sure.
But, remember, stock-markets can remain irrational for longer than you can remain solvent.
W&D makes two serious observations.
Firstly, don't trust the companies. When profitabilty gets squeezed, companies start 'adjusting' data for 'one-time' exceptions and special items. The reported profit data for the Dec-15 quarter was 30% away from that reported under generally accepted accounting principles. This is more than twice the normal gap. And W&D expects this gap to increase.
Secondly, don't trust the analysts. Analysts' forecasts always decline in the months leading up to when companies report their profits. This strategy means that analysts' over-optimistic forecasts (used to pump up share-price targets) become something that companies can normally beat.
And companies also do this: so far 94 of 121 S&P500 companies giving profit guidance have given a profit-fall warning. This is the highest since this data was first collected in 2006 .
So what, W&D!
Well, readers, the outlook is a little better in Australia (and a lot better for First Samuel clients). But W&D's point is that the US stock-market may get the serious yips over the coming months. Which will, for a short-time, cascade over to Australia.
Strong stomachs may be needed.
W&D isn't going anywhere in May. And being of strong stomach, will stick it out.