Every Sector Has Seen Multiple Compression In 2018

Does The Stock Market Matter To Trade?

On Monday, Commerce Secretary Wilbur Ross claimed there was no level the stock market could fall to that would cause the President to change his trade policy. It’s not surprising to hear the White House claim this because if it stated there was a level the market could fall to, the countries negotiating with America would get the upper hand. In a game of chicken, you lose if you name your breaking point. It’s possible market participants would test that level to see what would happen.

It’s important for investors to understand that the stock market matters a lot to the negotiations on America’s side. Obviously, there is a breaking point on each side, but we don’t know it. Because earnings are up so much this year, the trade tariff stories haven’t been able to push the market down. Trump is using his leverage to get the best deal. The longer this negotiation lasts, the more likely stocks will fall, forcing a deal.

Are Buybacks Holding Up The Market?

As I mentioned earnings growth is holding the market up. Some say buybacks are keeping the market up. That’s essentially the same thing. Buybacks happen to be one of the best ways capital can be deployed. However, without earnings growth, you don’t have the explosion in buybacks. The key points to understand are that buybacks aren’t bad for firms and that they don’t cause bubbles. If you say buybacks cause bubbles, the same point can be made about any catalyst which drives stocks up. It’s turning anything that’s good into a bad sign. The two issues to keep in mind with buybacks are when the share count goes up even with buybacks because of stock-based compensation and when excessive debt is taken out to fund buybacks.

Great Q2 Earnings Results

According to FactSet, the bottom up EPS estimates from Q2 increased 0.8% which is amazing because every quarter from Q1 2011 to Q4 2017 saw estimates decline. Besides last quarter, this intra-quarter earnings estimate boost was the largest since Q2 2010. This quarter is the 2nd one since Q4 2010 where the estimates increased, and stocks increased. Most of the quarters saw earnings declines with an increase in prices. As long as earnings growth is occurring, a decline in estimates isn’t the end of the world, but clearly, it’s better for them to go up.

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