Market Beat: So far, so good in the third quarter
November 5, 2018
We're about halfway through earnings reporting season and the results have been good so far, however the stock market is going through a volatile phase.
The valuation of the market is still relatively high even though it has fallen somewhat in recent weeks. The current PE or price to earnings ratio is 15.5 which is above the 10-year average of 14.5 but has dropped below the five-year average of 16.4.
As of Oct. 29, 48 percent of S&P 500 companies have reported their earnings. According to data from FactSet, 77 percent of them have reported earnings above the mean estimate and that is slightly higher than the five-year average of 71 percent. The current year over year earnings growth rate for the S&P 500 is at 22.5 percent. If the earnings growth rate stays this high, it will be the third best quarter since 2010.
The Energy sector is reporting the highest rate of earnings growth at 95.3 percent, mostly due to higher oil prices. The Financials sector is reporting the next best rate of growth at 35.5 percent and the new Communications Services sector is reporting the third best rate of earnings growth at 27.2 percent.
One interesting factor that we've seen this quarter is that companies who are reporting better than expected earnings are still seeing their share prices drop. By measuring a company's price two days before and then two days after the earnings announcement, stocks that have reported better than expected earnings have had their share price drop by an average of -1.5 percent. Stocks normally go up by an average of 1 percent over the same time frame after beating an earnings estimate. Companies that have reported lower than expected earnings have seen their share prices drop by an average of -3.8 percent and the five-year average is a drop of -2.5 percent.
So, even though the earnings reports have been good overall, we are still seeing a drop in stock prices.
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It is typical for the market to be volatile this time of year. There's an old saying that says, "Sell in May and go away." On average, stocks perform the best between Nov. 1 and April 1 and are not as good from May 1 through the end of October. September is the worst month for the market on average and some of the largest crashes, like the 1929 and 1987 crashes have occurred in October.
The underlying economy is strong, but there are several issues that are worrying investors.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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