The parade of conflicting economic signals continues.
Monday morning the market rallied around news that US-China trade negotiations are in the "final stages" but then faded into the red.
Last Thursday, I wrote about market volatility and how we might be in for a bit of a correction. But everyone is asking the same question now. What's next?
Well, if we go by the numbers, we're still getting a conflicting picture.
In positive news, both the U.S. and European central banks have taken a more dovish stance on interest rates. Last week, fourth quarter GDP came in at 2.6% , which beat expectations of 2.3%. In addition, consumer confidence , which had lagged badly at the end of 2018, came in at 131.4 beating expectations of 125.0.
At the same time, initial jobless claims rose to 225K , worse than expectations of 221K. Personal spending dipped 0.5% , disappointing observers expecting a 0.2% decline and registering much worse than November's 0.6% gain. And consumer sentiment declined to 93.8 in late February from 95.5 earlier in the month.
I'm going to write something you might find odd. The great gains for 2019 are coming to a close.
Or at least they are going to be a lot slower.
That may seem an odd statement given what seemed like a great earnings season. It didn't take any statistical analysis to determine that most companies reported positive earnings.
But the folks at FactSet put some perspective on the situation on Friday after 96% of the S&P 500 had reported for Q4.
In terms of earnings, the percentage of companies reporting actual EPS above estimates (69%) is below the five-year average. In aggregate, companies are reporting earnings that are 3.3% above the estimates, which is also below the five-year average. In terms of revenues, the percentage of companies reporting actual revenues above estimates (61%) is slightly above the five-year average. In aggregate, companies are reporting revenues that are 0.3% above the estimates, which is below the five-year average.
So, earnings season felt positive, but historically it really wasn't up to par. That in itself at least shows some signs of slowing.
And, as I discussed previously , guidance for many companies was quite poor. Again, FactSet has already crunched the numbers.
During the first two months of the first quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates of all the companies in the index) dropped by 6.5% (to $37.60 from $40.21) during this period. How significant is a 6.5% decline in the bottom-up EPS estimate during the first two months of a quarter? How does this decrease compare to recent quarters?
During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.4%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.8%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.9%. Thus, the decline in the bottom-up EPS estimate recorded during the first two months of the first quarter was larger than the five- year average, the 10-year average, and the 15-year average.
There is every indication that next earnings season, and the one after that, will not be nearly as good as the one we are completing.
Here's what this means for you and me - picking the winners from the losers is about to get more difficult
Growth investing icon Louis Navellier has been calling for this market dynamic since the end of 2018. More narrow market gains were going to be the norm after Q4 reporting, and that's exactly the set up we are encountering now. Here is what Louis recently wrote to subscribers of his Growth Investor service.
The fourth-quarter earnings season represents peak earnings for many S&P 500 companies. Many companies are facing more difficult year-over-year comparisons and a strong currency headwind. So, while the S&P 500 should continue to climb higher in the upcoming months, it will be at a significantly slower pace.
Not all stocks will thrive in this environment. The stock market will narrow, as institutional investors chase fewer stocks. Essentially, the stock market will act like a funnel and divert funds to stocks that will continue to prosper in a decelerating earnings environment.
Louis specializes in identifying the stocks to invest in before the institutional investors go all in. That means his subscribers often get to establish positions before the big institutions deploy their billions of dollars into a stock, driving its price way up.
One of those stocks recently hit a 52-week high - and officially passed the 100% increase in his portfolio, VMWare, Inc.
VMware is a software company that develops computer programs used to create and manage virtual machines. In other words, they help make cloud computing possible.
Below is a chart with VMWare's performance compared to the S&P 500. As you can see, the S&P hasn't had a bad run, but VMW has left it in the dust.
Here is what Louis wrote to his Growth Investor subscribers ahead of VMWare's earnings announcement last Thursday.
We're seeing institutional investors chase VMware, Inc. (VMW) ahead of its fourth-quarter earnings results tomorrow, after the market close. In fact, it hit a new 52-week high of $176.66 on Wednesday morning.
VMW is a leader in the cloud computing field; it is the infrastructure platform choice of 100% of the Fortune 500. It also has strong marketing relationships with computer hardware vendors, like Dell (DELL), Hewlett-Packard (HPE) and IBM (IBM).
Cloud computing remains a hot trend, as there's been an explosion in storing pictures, video and data in the cloud, or, in other words, on data servers. Folks' addiction to smart phones is also boosting storage on the cloud, thanks to higher resolution pictures. This trend is so strong that CenturyLink and Statistica expect the cloud computing market to reach a whopping $411 billion by 2020.
As a result, I expect VMware to post strong results on Thursday.
And sure enough, that is what happened.
Reporting after market close, VMware reported revenue of $2.59 billion and beat the Wall Street consensus estimate for $2.5 billion, according to FactSet. Adjusted earnings per share came in at $1.98, compared with the $1.88 average forecast.
VMware stock was up more than 4% on Friday.
Picking the winners like VMWare is about to get a lot tougher. Markets are already anticipating a US-China trade deal, and now it's the bad news that seems to move the market more than any good news.
Stay focused on your plan and the fundamentals of your investments. As Louis noted, the market is going to narrow. You can still invest in the ones that perform well, but keep your asset allocation , always more important that stock picking, in mind as you go.
To a richer life…
Luis Hernandez, Managing Editor
and the research team at InvestorPlace.com