In the 72 years since the conclusion of
World War II, there have been 11 recessions, according to the National Bureau
of Economic Research, or approximately one per every six-and-a-half years on
average. Likewise, the post WWII epoch has featured 11 bear markets in
stocks according to Yardeni Research, Inc., for the same six-and-a-half year
average period between stock market declines in excess of 20%. Our current dual
economic expansion will measure eight-and-a-half years on Dec. 31, yet evidence
seems to imply that growth is accelerating.
Last Friday, the Wall Street Journal
detailed a broad based hastening of activity in the shipping and trucking
industries:
From seaports in Southern California to
truck docks at Central Ohio warehouses, shipping across the U.S. is picking up
at a pace that freight companies say they haven’t seen in several years . . .
Freight volumes at the port of Los Angeles and Long Beach usually begin to slow
as Black Friday nears, but [Shane VanDerWaag, director of intermodal services
at the Dependable Cos., in Southern California] said his drivers remained as
busy as ever . . . For the Port Authority of New York and New Jersey, October’s
total cargo volume broke the record for the month.
The article also notes that the Cass
Truckload Linehaul Index, which measures per-mile pricing for truckload
carriers, jumped to a fresh all-time high in October on the strength of a meaty
5.5% year-over-year advance.
The suddenly brisk pace of commerce is
not confined to the coasts. The Nov. 15 edition of the Minneapolis
Star Tribune (thanks to Biff Robillard, president of Bannerstone Capital
and paid-up Grant’s subscriber, for sharing this) noted that: “Iron ore
shipments traveling from Minnesota across the Great Lakes – St. Lawrence Seaway
are at the highest level they have been in a decade” with a 36% year-over-year
jump in iron-ore shipments out of Duluth this year through September. The
Baltic Dry Shipping Index, which has spent the post-crisis years in virtually
constant descent (97% peak-to-trough) has more than doubled from February and
is up nearly fivefold from its February 2016 nadir.
As a result, hard data (such as
industrial production and durable goods orders) are catching up to survey and
sentiment soundings, i.e., soft data, which surged post the Nov. 8, 2016
election. Bianco Research reports that hard data have since the end of
October, exceeded consensus expectations at the highest rate since early 2014.
It’s not just economic data and
bustling transportation pointing to a strong economy. Corporate profitability
is likewise percolating. Domestic earnings via the index-adjusted S&P 500
EPS metric were up by 10.8% in the third quarter, and nearly 22% from their
third quarter interim trough (recall that early 2016 was an unpleasant period
for asset prices) to reach a fresh record high. According to Factset,
74% of S&P 500 companies have reported positive EPS surprises in the third
quarter with 67% surprising to the upside on revenues. Factset likewise
predicts the bountiful times will continue in the fourth quarter, forecasting a
10.5% year-over-year gain in EPS with all eleven S&P 500 sectors expected
to report growth in the bottom line.
Companies are earning more, data are
looking better, and activity is humming. Does that mean the bull market
is set to continue? Not necessarily: The end of 2007 featured a surging
Baltic Dry Index, a Fed Funds rate still well north of 4% and S&P 500 Index
Adjusted EPS jumping by 46% in the three years ended in the third quarter of
2007.
These economic readings are coincident
indicators and don’t tell us what will happen in 2018. Perhaps the tax
reform bill will drive us further into financial Valhalla, or perhaps the Fed’s
tightening regime (futures currently price in a 98% change of a rate hike at
the Dec. 13 meeting) and acompanying rise in short term rates in tandem with
flat or falling long term rates will lead to an inverted yield curve and spell
the end of this charmed ascent. The cycle will turn eventually. Right?
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