Tomorrow marks the 1-year anniversary of the 3/23/20 market low. Roughly +75% later, the only historical comps even in the ballpark are the first 12 months off the 1982 low (+58%) and the first 12 months off the 2009 low (+69%). One of our themes over the last year has been, unique crisis / ordinary market, and in that spirit, we want to reemphasize how different year 2 off the low looks typically looks compared to year 1… performance tends to be more in line with historical averages and it’s rarely a straight line getting there.
None of this is bearish, just a dynamic to be mindful of. There’s some irony to it all of course, as the first year off a low makes very little intellectual sense despite the robust returns… “how can the market be up so much when the economy is so bad!” While in year 2, the narrative is often quite obvious and embraced but performance seems more challenging… “the economy looks great, but gosh this market is a grind!” Also in this spirit, we’ve included market performance during the best real GDP years in history – 1950, 1951, 1955, and 1984 – again, returns are generally solid, but there can be corrections along the way.
The good news is there are very few signs of any broadening of selling pressure, despite the recent weakness in the growth and longer duration corners of the market. We find it curious that Friday’s fresh closing high in 10-year yields was not met with lower-lows in the QQQ’s, TSLA, or even Gold… a modest divergence at this point, but worth noting. Also curious is the relative resiliency the Homebuilders have continued to exhibit despite the rate move – the XHB broke to new relative strength highs vs the S&P last week.
Revenue Growth Expectations For 1Q Earnings Season Are 8.6%
With the 4th quarter reporting season completed, attention is turning to the first-quarter estimates, where revenue expectations are quite strong. It is worth keeping in mind that a portion of the reason for elevated expectations is due to the economy's closing in the first quarter of last year. As it stands now, the financials are set to see top-line growth of 24%, with the S&P up 8.6%.
Earnings Growth Estimated To Be Greater Than 20%
In the last several quarters, we have felt that earnings growth expectations are overly pessimistic. While 20% growth seems like an optimistic estimate, the year-over-year comparisons are against a quarter where much uncertainty sank in. It would not shock us to see companies surprise to the upside again this quarter, similar to what occurred as the U.S. emerged from the financial crisis.
Credit Conditions Are Strongest In Years
Last week, the American Banks Association released its Credit Conditions Index. With additional stimulus on the horizon, the report showed that credit quality and availability expectations improved for both consumers and businesses. The headline credit index surged more than 34 points to 77.9, its highest reading since mid-2014 and the biggest single-quarter increase in the Index’s history.
3-Month Treasury Bills Turn Negative
Last Friday, the ask-yield for the 3-month Treasury bill turned negative, which we thought was noteworthy. While this has occurred in the past, we believe it is worth watching since historically, the 3-Month Treasury bill has a 0.99 correlation with the Fed Fund rate. An extended period of negative rates may lead to a change in the IOER as well.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by FactSet.
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