Making sense of the markets this week: April 26, 2021

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Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

It’s U.S. earnings season, and things are looking up

From Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., here is a fantastic overview of the (early) results of U.S. earnings season. The summary: We are off to a great start, as expected. And, actually, things are even better than expected. Sonders opened her post with some key observations:

“With less than 10% of the S&P 500 having reported, results are strong and have boosted the blended consensus for first quarter year-over-year earnings growth to nearly 31% from 25%.

“Both the beat rate, and the percent by which companies have been beating estimates, are well above historical norms.

“The denominator effect of improving earnings (E) is helping ease some valuation concerns; but overall, the market remains historically expensive.”

One of the most important metrics for evaluation stocks is the P/E (price to earnings) ratio. We pay attention to that measure to ensure we do not overpay for stocks. Price in this equation is the stock price, and earnings is the profits that you are purchasing. How much earnings are you buying when you own a stock? Greater earnings is desirable, of course, but you won’t be owning greater earnings if the price you have to pay for the stocks is increasing at a greater rate than the earnings increase. All said, it’s healthy to see that E on the march onwards and upwards. From that post…

“Based on Refinitiv data, the year-over-year ‘blended’ earnings growth estimate (combining actual reports to date with consensus estimates) has jumped to nearly 31%. If it remains at that level, it would be the highest quarterly growth rate since the fourth quarter of 2010.

“In aggregate, companies have reported earnings 30.8% above expectations; compared to a long-term (since 1994) average of 3.5% above estimates and average of 15.2% for the past four quarters. The percent of companies reporting better-than-expected earnings (‘beat rate’) is 85%; with only 13% having reported weaker-than-expected earnings (‘miss rate”). That compares to an average beat rate of 65% and miss rate of 20% since 1994; and an average beat rate of 78% and miss rate of 19% over the past four quarters.”

In the post, you’ll also see a table offering the earnings performance by sector, which also includes projections into 2022. With the reflation trade underway, it’s not surprising to see the strong numbers and estimates for energy, industrials, materials and consumer discretionary. And Sonders nicely frames the U.S. stock-valuation dilemma…

“[T]oward the end of last year, the forward P/E for the S&P 500 had surged to 27. Given that was directly in line with multiples in the late-1990s into the March 2000 market peak; valuation concerns were rampant as we entered 2021. However, unlike the late-1990s—when earnings were rising toward a peak—the surge in the P/E recently was driven by the plunge in earnings. Recently though, thanks to the epic surge in earnings coming from the lows of last year, the forward P/E quickly reset to 22 (before bouncing to 23). That is by no means cheap; but highlights the power of the denominator in the current environment—distinctly different than what occurred in 2000.”

Not cheap indeed. But perhaps we’re not in dot-com crash territory. As a semi-retiree, I continue to trim the U.S. high flyers in my wife’s portfolio, and mine. In a market correction, those gains (that stock market rug) could be pulled out from underneath, in a hurry. I’m happy to profit from any additional stock price increases. Take what the market gives you. It often goes by the name of portfolio rebalancing.

A look at key U.S. stocks

Last week, U.S. financials kicked things off in style, with Bank of America setting the stage. The bank reported Q1 EPS (earnings per share) of $0.86, up from $0.40 in the year-ago period and above the consensus of $0.65. Loan loss provisions (money set aside for bad loans) are being moved off of that ledger and released, which will benefit the earnings picture. For Bank of America, that amount for the quarter was $2.7 billion. Earnings growth opportunities include higher interest rates, loan growth, investment banking expansion and better efficiency ratios. Major banks such as JPMorgan Chase and Goldman Sachs reported better-than-expected profits in the past week. As we’ve discussed in this space, banks can perform well in a rising-rate environment. Banks might be a good hedge, should that event become a growing concern. On Tuesday, April 20, Telco behemoth AT&T offered very good results that topped estimates. Cash from operations totalled $9.9 billion, up 12% on the year, with free cash flow of US$5.9 billion for the quarter. From Seeking Alpha:

“Revenue was up 3% on the year to $43.9B and the $0.86 EPS beat estimates by $0.08.

“Group sales were up 3% to $43.9B, topping the $42.4B consensus estimate.

“HBO Max gained 2.7M U.S. subscribing, bringing the total up to 44.2M. Worldwide subscribers totaled 64M.”

AT&T leads to another interesting stock story for the week: The “disappointing” results for stock market darling Netflix. You know, Netflix from the famed FAANG gang of Facebook, Apple, Amazon, Netflix and Google. Netflix beat on revenue expectations, with an incredible 24% increase year over year. That might not be surprising, though, given the the stay-at-home and watch-movies-at-home reality of the pandemic. That said, the new subscriber growth of 3.98 million was short of expectations. Netflix then guided that they expect “only” 1 million new subscribers for the second quarter of 2021. The stock was hit hard upon earnings release, down by over 10% on Tuesday. But the trend continues and, as at-home streaming continues to displace traditional TV, that trend may perhaps become lasting and permanent. And while we crave experiences, heading off to crowded movie theatres might not be top of the list for things to do on the other side of the pandemic. In the defensive consumer staple stock category, Procter & Gamble delivered another very solid quarter, beating on revenue and earnings. Revenue was up 5.25% year over year. While these boring types of stocks may not do much when the stock markets are roaring, we might be glad to hold them if or when we move into periods of prolonged recessions. In that boring category, I hold Colgate-Palmolive, Walmart and Pepsi. Other names in the index of boring but solid are KImberly-Clark, Costco, Coca-Cola, General Mills and Kraft-Heinz. These types of stocks and the sector can hold up well in economically challenging times, given that their products are essential. They can underperform for extended periods, but we should remember why we hold them as more “risk off” stocks.

Flying high?

Another interesting sector to keep an eye on is the airlines. Like you and me, those companies can’t wait to get to the other side of the pandemic. As we’ve mentioned often in this column, the pent-up demand for travel is incredible. How long will we have to wait to book flights? How long will airlines have to wait to book profits? This week, United Airlines reported. And this might be airlines’ worst quarter for earnings and revenue comparisons year-over-year. In the first quarter of 2020—January to the end of March—we were in the beginning of lockdowns and the end of recreational and business travel. Revenue of $3.22 billion was down by 59.6% year over year, with a quarterly loss of $7.50 per share versus estimates of a loss of $6.97. This compares to a loss of $2.57 per share a year ago. But it was the second-quarter 2021 outlook that sunk the stock. In the following they are comparing to 2019, a pre-COVID quarterly report and time period. The company expects second quarter 2021 total revenue per available seat mile (TRASM) to be down approximately 20% versus the second quarter 2019. The company expects second-quarter 2021 capacity to be down around 45% versus the second quarter of 2019. The stock was down by more than 10% after the earnings release. That said, investors are forward-thinking in regard to this recovery stock. United shares have added about 29.2% since the beginning of the year versus the S&P 500’s gain of 11.4% (to Monday, April 19). Global COVID vaccine deliveries and the path of the pandemic continues to be the wild card for airlines and many other entertainment, travel and hospitality companies. It’s vaccines vs. the virus. On the cryptocurrency front, bitcoin is taking a tumble—down almost 20% over the last week. It’s been suggested that the correction was aided by U.S. President Joe Biden’s suggestion that he would double capital gains taxes. We’ll keep an eye on tax increases and ‘threats’ on both sides of the border.

And, just for fun, when will the stock market bull run end?

While no one knows the direction of stock markets with any certainty, we can and often do look to the past for clues about the future. Stock market history does not always repeat, but it can rhyme at times. When will the bull market in stocks end? Here’s what history has to say about the current bull run, according to that CNBC post…

“The speed of this bull market makes sense when one looks at how quickly the bear market of 2020 occurred: 33 days from peak to trough, according to CFRA. ‘The fastest on record,’ according to Sam Stovall, CFRA’s chief investment strategist. And then the market recovered everything it had lost in fewer than five months, the third-shortest period in market history to recoup such a massive level of losses. The history of the past 12 bull markets shows that those that bounced back from bear markets fastest also lasted the longest, on average. Only four of the past 12 bull markets did not make it to 1,000 days. The remaining bulls lasted from four years (October 1957) to nearly 11 years (March 2009).”

The post explains bull markets that return quicker (after a correction) are an indication that investors were more certain of an economic and earnings recovery. I’m not so sure that’s what happened here. Go back to the early stages of the pandemic and this was more likely to be the outcome. We are potentially saved by miracle vaccines. Stock market history is always interesting. Sometimes it makes sense, at times it’s for entertainment purposes only. I will let you decide. Personally, I’ll look back to this post I wrote at the beginning of the pandemic. The stock markets are ridiculous. Maybe you shouldn’t look. I’m sticking to that narrative. And we should simply remember that stock market corrections are a normal and expected event. We just don’t often (or ever) know the timing. Always be prepared. Stock market bull runs don’t die of old age.

The Canadian budget: Spendapalooza 2021

The Liberal party recently released its first budget in over two years. On his own site, MoneySense columnist Jonathan Chevreau called it “Spendapalooza 2021.” The Chevreau’s Financial Independence Hub post is a great one-stop resource for all things budget (or Spendapalooza), and includes many great links to commentary and opinion from economists plus financial and investment experts. It is certainly a big spending budget. Is it too much of a good thing? The government wants to make sure that we get to the other side of the pandemic and restore the fractured service and retail economy along with the many displaced workers. There was not much in the budget that will affect the many fortunate Canadians who were able to keep working during the pandemic. Not even on the tax front. There were no major tax announcements. From that Chevreau post …

“As interesting as what was announced is what many feared might be announced and didn’t happen. As far as I can see at this point, there was no move to end the tax-free gains of a principal residence, nor did I see any changes in capital gains tax inclusion rates on investments in general.”

In this space we previously asked how are we going to pay for the pandemic stimulus. Stay tuned on that tax front, I’d suggest. One key focus that may be well received is $30 billion over five years, and $8.3 billion a year thereafter for a national childcare and early learning program. There is also a $500 one-time Old Age Security payment for who are seniors 75 or older (as of June 2022) coming in August, followed by a 10% rise in regular OAS benefits in July 2022. But the big headline of Spendapalooza will be its price tag and the growing debts and deficits. There is currently no plan to eliminate the deficit. Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge.

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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