Americans’ Satisfaction With Economy Reaches 17-Year High, Poll Finds

(…) One year after President Donald Trump’s inauguration, the share of Americans who are satisfied with the economy has jumped to 69%, the highest level since 2001. The tax law that Mr. Trump signed last month has been gaining acceptance, as the share of Americans who thought it was a good idea grew to 30%, from 24% last month. A larger share, 38%, this month called the bill a bad idea.

Looking to the midterm elections, the poll found that voters prefer a Democratic-led Congress over a Republican one by a six-point margin—a narrower advantage than the 11-point lead that Democrats held in December. (…)

The share of people who gave him high marks for changing “business as usual in Washington” dropped to 35% from 45% in February, just after he took office. Those rating him highly for “being effective and getting things done” dropped to 36% from 46%.

Some 19% gave Mr. Trump high ratings for “having the right temperament for the job,” with 64% giving low ratings. His overall job approval rating—39%—is the lowest recorded by WSJ/NBC pollsters for a president at the end of his first year.

Asked about how they felt about Mr. Trump in specific roles—as a leader, as commander in chief, as a role model and as a representative of America abroad—more than half in each case said they felt negatively about Mr. Trump. When the same questions were asked about President Barack Obama in 2010, a majority felt positively about him in all those roles except as commander in chief. (…)

Americans’ positive view of the economy is up 14 percentage points from 56% last April and marks a big shift in the mood of the country. “The youngest voters in 2018 do not know an America where economic optimism has been the prevailing sentiment,” said Micah Roberts, a GOP pollster who worked on the survey.

The mood shift isn’t a purely partisan phenomenon, although Republicans are the most enthusiastic: 86% of Republicans, 57% of Democrats and 65% of independents say they are satisfied with the state of the economy. (…)

BTW, the U.S. economy peaked out in March 2001, 17 years ago…

Consumer Sentiment Slides for Third-Straight Month

The University of Michigan on Friday said its consumer sentiment index was 94.4 in early January, down slightly from 95.9 in December. It dropped in December and November after hitting the highest level since 2004 in October. (…)

“The drop in the headline index…was entirely driven by a decline in the current conditions index,” Michael Pearce, senior U.S. economist for Capital Economics said in a note to clients. “That is a bit strange considering that the labour market, which typically drives perceptions of current conditions, remains exceptionally strong with jobless claims falling to a 45-year low last week.” (…)

US banks suffer 20% jump in credit card losses Rising soured debts raise concerns about the financial health of middle America

(…) Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago. (…)

In the final three months of 2017, the big four US banks wrote off $3.2bn in credit card debts, up 16 per cent from the same period a year ago, and several issuers have put investors on notice for further losses because of expanding loan books. (…)

UPSIDE RISKS TO WAGES FROM IG METALL NEGOTIATIONS The outcome of German wage negotiations will have important implications for the broader inflation outlook in the euro area, and thus for ECB policy.

(…) IG Metall is by far the most important union to watch, representing almost 4 million German workers and being seen as a benchmark, including in the car industry or the construction sector this year. (…)

IG Metall has asked for a 6% pay hike in the metal and engineering sector, well within the range of their past demands. Historically, they would get less than half of this, or slightly less than 3% in nominal annualised terms once one-off payments are included. This time looks different, with economic conditions the most favourable in decades and bottlenecks increasingly visible in several segments of the German labour market. (…)

The Bundesbank projections which fed into ECB staff forecasts in December have compensation per employee rising only gradually to 2.7% in 2018 (from 2.6%), and to 3.1% in 2019. This suggests that an IG Metall deal setting wage increases at around 3.5%, for example, would have the potential to surprise the ECB positively, adding to the current hawkish communication shift.

EARNINGS WATCH

It’s early in this Q4 earnings season but the effects of the tax reform are already messing things up.

• Purists will want to use Factset’s GAAP data which simply flows through any tax-reform related items:

Overall, 11% of the companies in the S&P 500 have reported earnings to date for the fourth quarter. Of these companies, 68% have reported actual EPS above the mean EPS estimate, 11% have reported actual EPS equal to the mean EPS estimate, and 21% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is below the 1-year (72%) average and below the 5-year (69%) average.

In aggregate, companies are reporting earnings that are 53.0% below expectations. This surprise percentage is well below the 1-year (+4.6%) average and below the 5-year (+4.3%) average.

The Industrials (+18.5%) and Energy (+11.7%) sectors are reporting the largest upside aggregate differences between actual earnings and estimated earnings. On the other hand, the Financials sector (-97.4%) is reporting the largest downside aggregate difference between actual earnings and estimated earnings.

In terms of revenues, 85% of companies have reported actual sales above estimated sales and 15% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is well above the 1-year average (64%) and well above the 5-year average (56%).

In aggregate, companies are reporting sales that are 0.9% above expectations. This surprise percentage is above the 1-year (+0.8%) average and above the 5-year (+0.6%) average.

The blended earnings decline for the fourth quarter is -0.2% today, which is much lower than the earnings growth rate of 10.0% last week. Negative earnings surprises reported by companies in the Financials sector were responsible for the sharp decrease in the earnings growth rate for the index during the past week. As a result, the blended earnings growth rate for the Financials sector decreased to -57.1% from 5.8% during this period.

The blended sales growth rate for the third quarter is 6.9% today, which is slightly above the sales growth rate of 6.8% last week.

The exclusion game begins:

On January 16, [Citigroup] announced actual earnings for the fourth quarter that were substantially below the expectations of analysts. Citigroup reported actual EPS of -$7.15, compared to the mean EPS estimate of $0.56. The actual EPS of -$7.15 “included an estimated one-time, noncash charge of $22 billion, or $8.43 per share, recorded in the tax line within Corporate / Other, related to the enactment of the Tax Cuts and Jobs Act (Tax Reform).”  (…)

Other companies have contributed to the decline in earnings for the Financials sector by reporting negative earnings surprises due to charges or expenses related to the tax law, including American Express (-$1.41 vs. $1.55), Goldman Sachs (-$5.51 vs. $4.92), Bank of America ($0.20 vs. $0.45), and JPMorgan Chase ($1.07 vs. $1.69). If the entire Financials sector were excluded, the earnings growth rate for the S&P 500 would improve to 11.2% from -0.2%.

• If Citigroup alone were excluded, the earnings decline for the Financials sector would improve to -10.1% from -57.1%, while the earnings growth for the S&P 500 would improve to 7.9% from -0.2%.
• If the Financials sector were excluded, the earnings growth for the S&P 500 would improve to 11.2% from -0.2%.

S&P and Thomson Reuters/IBES provide “operating” earnings which exclude the one-time effects of the tax reform.

• Here’s TR’s weekly summary:

Through January 19, 53 companies in the S&P 500 Index have reported earnings for Q4 2017. Of these companies, 79.2% [76.9% last week] reported earnings above analyst expectations and 9.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates. Over the past four quarters, 72% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 4.4% [5.9%] above estimates, which is above the 3.1% long-term (since 1994) average surprise factor, and below the 4.7% surprise factor recorded over the past four quarters.

The estimated earnings growth rate for the S&P 500 for Q4 2017 is 12.4% [12.1%]. If the Energy sector is excluded, the growth rate declines to 9.9% [9.6%].

Of these companies, 86.8% reported revenues above analyst expectations and 13.2% reported revenues below analyst expectations. In aggregate, companies are reporting revenues that are 1.4% above estimates.

The estimated revenue growth rate for the S&P 500 for Q4 2017 is 7.1% [7.0%]. If the Energy sector is excluded, the growth rate declines to 5.9% [5.8%].

The estimated earnings growth rate for the S&P 500 for Q1 2018 is 16.0% [14.8%]. If the Energy sector is excluded, the growth rate declines to 14.3% [13.4%].

Analysts are busy revising their 2018 estimates as companies provide more details on how the tax reform should impact their results amid a generally upbeat economic environment.

Trailing EPS are now $131.88 [$131.71 last week] and could exceed $136 after Q1’18. Full year 2018 estimates are +15.3% [$151.76], up from +14.5% last week and +12.0% on January 1.

S&P data show full year 2017 “operating” EPS at $124.76, 5.1% below TR’s number. Interestingly, the 3 main aggregators currently forecast very similar full year 2018 EPS ($150.57 to $151.76).

Based on trailing EPS, the S&P 500 Index trades at a P/E of 21.3x and a Rule of 20 P/E of 23.1.

• Let’s incorporate the tax reform and use trailing EPS after Q1’18: the P/E declines to 20.7 and the Rule of 20 P/E to 22.5.
• Using full year 2018 estimates of $151.00, the P/E declines to 18.6 and the Rule of 20 P/E to 20.4. Keep in mind that the chart below uses actual forward EPS which have proven to be, on average, 6% below the beginning of the year estimates.

SENTIMENT WATCH

US stocks set record for steadiness on choppy seas Market shrugs off shutdown fears to complete longest streak without major reversal

(…) Friday’s 0.4 per cent gain in the US equity benchmark extended its streak of trading days without a 5 per cent reversal to 395 — a record since it was launched in 1927. (…)

• ‘The Intensity Is Crazy’: Stock Advisers Bask in the Bull Market

(…) “The intensity is crazy” — both at home and in the offices of Point View Wealth Management in Summit, New Jersey, where Petrides manages money. “Phone calls, emails, conference calls, and everyone wanted to know about the tax cuts and what it means for the market.” (…)

Two things are driving the rally. One is earnings optimism fueled partly by President Donald Trump’s tax overhaul. Based on analyst forecast for individual companies, S&P 500 members are expected to earn a combined $151.60 a share in 2018 and $167.40 in 2019. Both figures have risen about 4 percent from mid-December for one of the biggest upward revisions on record.

The other is the crush of money landing in equity markets. Global stock funds have taken in $58 billion over the last four weeks, the most ever recorded, according to Bank of America Corp. research based on EPFR data. That includes $23.9 billion last week, with the largest share going to to U.S. funds. (…)

“I am getting more calls than before, and half of the clients is asking if it’s time to pull back from equities, while other half wants to go all in,” (…)

• Still making history. Record number of bulls and bears almost extinct (Yardeni)

• Hedge funds are unhedged.

  

  Source: BofAML (via The Daily Shot)

• Ah! Shut down!

Apart from any possible short-term perturbations that might result from a shutdown, the historical records show that investors have fared well during years including shutdowns. According to James Brilliant, co-chief investment officer of Century Management Investment Advisors in Austin, Texas, the Standard & Poor’s 500 index returned an average of 14.24% in the 18 years that saw government shutdowns. In the seven years in which shutdowns led to federal furloughs, the average return was 15.56%. (Barron’s)

Here’s more serious stuff from Lowry’s Research:

Technicals still bullish

Over Lowry’s 92 year history of bull and bear markets, major tops have unfailingly been preceded by rising Supply and falling Demand. Yet, as of this week, our Buying Power Index was at a new high in its long-term uptrend dating from Nov. 2016, while our Selling Pressure Index was at a new low in its long-term downtrend, suggesting a healthy pattern of expanding Demand and contracting Supply.

Lowry’s breadth analysis also remains very positive with each of its Segmented Adv-Dec Lines – Large, Mid and Small Cap – also reaching new highs last week which also saw the largest percentage of New Highs since Dec. 2016. Similarly,

the percentage of NYSE stocks trading above their 30-week moving averages typically exhibits a series of descending peaks a year or more prior to major market tops. In contrast, this percentage is at a new high in an uptrend dating from Nov. 2016, suggesting that long-term upside momentum remains strong.

Note the use of “long-term upside momentum” as Lowry’s is also warning of a “whipsaw risk” given the current short-term overbought reading. This next chart from Ed Yardeni illustrates the over-extension…

…as tax reform is priced in:

The ECRI also gets an uptick:

Source: ECRI (via The Daily Shot)

So did ETFs (RBC)…

…particularly in large caps:

By Adding to the Debt, Tax Cuts Could Complicate Next Downturn In enacting a tax cut that is projected to raise annual federal-budget deficits to nearly $1 trillion in the coming years, Washington could be trading more growth now for the risk of more pain down the road.

(…) Budget analysts warn that future policy makers would have less ammunition to take such actions during the next recession because tax changes are projected to push already-rising national debt levels even higher. That could make the next downturn more severe than it would otherwise be and put added pressure on the Federal Reserve to respond to future crises. (…)

The publicly held debt, which doubled as a share of GDP during and after the 2007-09 recession, was projected before the tax cuts to rise from 78% this year to 91% over the coming decade. The CBO now expects the tax changes to send this ratio to 97.5%. (…)

Scary chart from Lance Roberts: