FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- S&P 500 Nearing Full Valuation as we approach 2500.
- Existing Home Prices hit a record high, but sales slow.
- Both Japan Mfg PMI and Eurozone Composite PMI slip again in July.
BUYER BEWARE, S&P 500 IS NEARING FULL VALUATION (TOUGH TO GET ABOVE 2532):
In short, you have to be a big believer in street forward estimates and also be willing to put a peak multiple on those lofty prognostications in order to be a buyer of the S&P 500 at these levels. Let us explain…
We feel that it’s important to note that Wall Street analysts are baking in 20% Y/Y earnings growth expectations for 2017, and are assuming another 13% growth on top of that for 2018. What’s most concerning about the street’s lofty earnings expectations is the composition by which the street believes earnings growth will be achieved. The street believes energy sector earnings will DOUBLE from here, while the Financials sector will see 20% earnings growth.
From a macro perspective, we will take the under on street estimates by a long shot. With oil stuck at $46 and with the yield curve flattening, it’s going to be tough to obtain street estimates in the year ahead. As we show in the table below, even if we believe street estimates and place a peak multiple of 18.5x those estimates, we are dangerously close to full S&P 500 valuation of 2532.
Note that over the past month, Wall Street analysts increased their Q2 EPS estimates by +$0.09/share to $31.15. However, the street lowered their 2017 EPS estimates by -$0.40/share to $127.86 and their 2018 EPS estimates by -$0.82/share to $144.82. This implies EPS growth of +20.3% Y/Y and +13.3% Y/Y in 2017 and 2018, respectively. For the reasons mentioned above, we are still below those lofty forecasts, but we still see decent EPS growth for 2017 and 2018.
HEALTH CARE, TECH, AND FINS LEAD Q2 S&P EARNINGS:
That being said, as of July 20th, 96 of the S&P 500 Index companies have reported Q2 earnings, of which 70 have beaten earnings (72.92%) and 16 have missed (16.67%), albeit on lowered estimates. Thus far, the beats have been led by the Health Care, Tech, and Financial sectors, as all 5 Health Care companies that reported earnings, 11 out of the 13 Tech that reported earnings, and 23 out of the 30 Financials companies that reported earnings have beaten estimates.
EXISTING HOMES SALES POST WORST MONTH SINCE FEBRUARY:
According to the National Association of Realtors, Existing Home Sales fell -1.8% M/M to a Seasonally-Adjusted-Annual-Rate of 5.52 million homes in June, and slowed to a Y/Y rate of just +0.7% (+2.7% prior). Furthermore, sales fell in three of four regions: the Northeast (-2.6% M/M), the West (-0.8% M/M), and the South (-4.7% M/M); however, sales increased +3.1% M/M in the Midwest.
First time home buyers accounted for 32% of sales (versus 33% previously). According to the report, home sales are constrained by low inventories and higher prices. As such, existing home inventory fell -0.5% M/M to 1.96 million homes (-7.1% Y/Y). Unsold inventory increased to 4.3 Months’ Supply (versus 4.2 prior).
EXISTING HOME PRICES AT RECORD HIGHS:
Median Existing Home Prices increased +4.5% M/M and +6.5% Y/Y to a record high $263,800 (+5.7% Y/Y prior). Furthermore, the Mean Existing Home Price increased +3.3% M/M and +4.9% Y/Y to a record high $303,900 (+4.8% Y/Y prior). Note that the average listing was lasted only 28 days, which is slightly above last month’s record pace if 27 days.
JAPAN PRELIMINARY MANUFACTURING PMI SLOWED AGAIN IN JULY:
The Nikkei Flash Japan Manufacturing PMI Index fell -0.2 points to 52.2 in July, it’s second consecutive decline, and the slowest pace since November 2016. Furthermore, the Manufacturing Output Index fell -0.8 points to 51.4. In the month, there were slower increases in New Orders, Output Prices, and Input Prices. Meanwhile, there were declines in Backlogs and Inventories, but Employment improved.
EUROZONE COMPOSITE PMI SLOWED AGAIN IN JULY:
The Markit Flash Eurozone PMI Composite Index fell -0.5 points to 55.8 in July. In fact, this is the slowest pace of growth since January; however, it still marks the 49th consecutive month of growth in the EU. In the month, the Services PMI was flat at 55.4 but the Manufacturing PMI fell for the first time in 10 months, down -0.6 points to 56.8.
Data within the Eurozone’s two largest economies worsened in the month. The German Composite PMI fell -1.3 points to 55.1, as the Services PMI fell -0.5 points to 53.5 and the German Manufacturing PMI slipped -2.9 points to 58.0. Also, the French Composite PMI fell -0.9 points to 55.7, as the French Services PMI fell -1.0 points to 55.9 but the Manufacturing PMI increased +0.6 points to 55.4.
U.S. GDP: Our GDP model points toward stronger growth in 2H 2017 (+3% Real GDP) given improvements in workforce population growth and workforce participation. Our official forecast for 2017 is 3.0%, however, recent data suggest downside risk to our forecast.
U.S. Inflation: U.S. CPI appears to be peaking as the Fed’s preferred inflation metric, the Core PCE Deflator slowed to +1.39% Y/Y in May (away from the Fed’s 2% inflation target). As we anniversary the drop in commodities prices, we expect headline inflation has hit a near-term peak, taking pressure off of the Fed’s current hawkish rate stance.
U.S. Federal Reserve: Given our belief that U.S. inflation peaked for the year a few months ago, we believe the FOMC will become increasingly more data-dependent. We believe the odds of another Fed hike in 2017 have come down given recent declines in inflation. The odds of balance sheet reduction should also be in decline as well, although the street expects balance sheet action to begin in September.
U.S. Treasuries: With headline CPI having hit a near-term peak of 2.7% Y/Y, we believe the 10-year U.S. Treasury is now range-bound through the end of the year. We would be inclined to be buyers of Treasuries if the 10-year yield were to approach its recent high of 2.63%.
U.S. Equities and Earnings: S&P 500 operating earnings will rise materially in 2017, but our yearend S&P 500 target of 2400 has already been attained. In fact, as mentioned above, we believe the S&P is now fully valued. With the S&P 500 nearing a possible inflection point, we are closing out all our sector views today. We continue to favor the homebuilders, given the demographic tail wind and lack of inventory.
Argentina: In short, the economic data out of Argentina remains bad (but less bad than it was a year ago). Industrial Production rebounded +2.7% Y/Y in May (-2.6% Y/Y prior), CPI is up +23.4% Y/Y in June (+25.4% Y/Y prior), Consumer Confidence remains depressed and fell again in June, and GDP is up just +0.3% Y/Y.
Brazil: Recent data has shown Business and Consumer Confidence continue to leak and Industrial Production is down -4.5% Y/Y, but retail sales are now up +2% Y/Y and there have been modest improvement in PMI’s in Q2. With inflation trending lower, the central bank can become more dovish. We are now evaluating Brazil for upside potential.
Canada: Given concerns about Canada’s housing market (Existing home sales were down -6.7% M/M in June), and potential fallout from lower oil prices, we added Canada to our downside risk watch; however, so far Canada’s economic data remain healthy. Consumer Confidence remains at high levels, manufacturing PMI’s remain strong, unemployment has been in a declining trend, retail sales have been improving, and Canada’s monthly GDP continues to improve (+3.3% Y/Y in April).
Mexico: Consumer Confidence is improving following a sharp decline but April Retail Sales slowed materially (+1.4% Y/Y versus +6.1% prior). Meanwhile, Inflation continues to rise, Unemployment has increased, Exports have slowed, but Manufacturing PMI and Orders surged higher in June.
Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again. We are hopeful …
United Kingdom: The U.K. economy seems to be showing some cracks of late. Retail Sales have slowed materially, Consumer Confidence has deteriorated, home price gains are slowing, and manufacturing PMI’s trended lower in Q2. Meanwhile, inflation is in an uptrend, but slipped recently. We are watching the U.K. for further deterioration.
European Union: Economic data had been improving in Europe through May, and today’s slight slip in PMI data shouldn’t derail that improvement. Note that we are seeing improvement in Southern EU nations as well (including Greece). As such, we are bullish on the Euro STOXX 50 Index.
European Central Banks: The ECB is doing exactly what we thought they would do by favoring asset purchases over furthering lowering rates into negative territory and now the ECB is facing rising inflation. The ECB has now begun to taper its asset purchases and certainly a discussion will begin on the process of how/when to raise rates. We will watch to see if ECB tapering has any meaningful impact on zero (or near-zero) interest rates throughout the continent.
Eastern Europe: We continue to believe risks remain for Eastern Europe given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).
South Africa: Political chaos and debt downgrade risk aside, South African data have improved in Q2 (higher PMI’s, higher retail sales, lower inflation, and improving business confidence), however, Unemployment remains persistently high.
Turkey: Despite the political situation, the macro backdrop has been quite strong. Consumer confidence has been rising for months, business confidence increased in June, industrial production accelerated to +5.9% Y/Y in April, Unemployment is turning lower again, and inflation has reversed its recent rising trend. One area to watch is the sharp decline in home sales (-8.1% Y/Y in June)
ASIA / PACIFIC:
Australia: The RBA has cut rates twice in the past year and Australian data is holding up. So far, business and consumer confidence have been strong, and PMI’s have held up, despite weakness in commodities prices. So far, housing data remains steady, but recent data have shown some weakness. We remain neutral on Australia at this time, on concerns about China exposure but so far China is still holding up.
China: Recent data suggest some modest improvement in the second quarter; while China’s consumer and services sectors remain resilient. We continue to believe China has the levers necessary to stimulate ahead of the National Communist Party Congress later this year, but we are watching for further signs of weakness.
India: Money supply growth is beginning to recover following last year’s currency demonetization, but industrial production and PMI’s have weakened of late and inflation is declining. Any economic improvement may already be priced in as the Sensex index is up 19% this year and trades at an above-average P/E.
Indonesia: Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, but Consumer Confidence and inflation appear to be turning higher. As a result, it is reasonable to assume that the central bank’s dovish policy stance (six rate cuts in 2016) may revert to a more neutral stance this year.
Japan: We have a bullish view on Japan’s Nikkei 225 given improvement in Japan economic activity, although the weakness in PMI’s over the past two months raises concern. Bank lending is improving on a Y/Y basis in Japan, industrial production has accelerated, and consumer confidence remains in a slow up-trend.
Russia: Russian economic data continue to post improvements (Composite PMI steady for months) although the recent decline in oil prices is a risk. Retail Sales have rebounded, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.2% in May. Meanwhile, inflation is moderating, which allowed the Bank of Russia to cut rates once again. Russian equities remain the cheapest in the industrialized world and we remain bullish.
GLOBAL CENTRAL BANK SCORECARD:
MACRO TRADING IDEAS:
WEEK IN REVIEW – BEST & WORST PERFORMERS:
S&P 500 SECTOR PERFORMANCE:
BEST/WORST PERFORMING GLOBAL STOCK MARKETS:
BEST/WORST PERFORMING WORLD BOND MARKETS:
COMMODITIES MARKET PERFORMANCE:
MAJOR GLOBAL STOCK MARKETS:
MAJOR GLOBAL BOND MARKETS:
This publication is for Institutional Investor use only and not for distribution to the general public. The comments herein are based on the author’s opinion at a particular point in time and may change at any time without notice. Merion Capital Group does not guarantee the accuracy or completeness of the information contained herein. Merion Capital Group is a FINRA-registered broker-dealer. Merion Capital Group shares in the commissions for trades that are executed through Tourmaline Partners, LLC, a FINRA-registered broker-dealer. This report is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Past performance is not a guarantee of future performance. All investments involve risk, including the loss of all of the original capital invested.