Putting America first was supposed to be about populism and leveled playing fields. Yet in the stock market, so far, that is not happening.
In a March 12 research report, Bespoke Investment Group unmasked the truth:
Since inauguration day, the best stocks had these things in common: high market capitalization, high dividend yield and large exposure to international markets. In fact, the largest 50 stocks in the S&P 500 had average gains of 4.63% while the smallest 50 were actually down 2.21%.
Bespoke analysts were blunt, noting that “this definitely hasn’t been a ‘rising tide lifts all boats’ kind of market.”
The early bet among the professional investing class was the Trump economy would disproportionately benefit smaller companies. They were in the best position to sell stuff domestically. That was the theory. Then again, the same observers assumed a Trump win would throw the markets into reverse.
Pay Close Attention to the Markets’ Messages
Understanding that markets often zig when they should zag is something Gilded Age trader Jesse Livermore did so well. Immortalized in the 1923 classic Reminiscences of a Stock Operator, he devoted his life to deciphering and taking advantage of important market messages.
The early message of the Trump stock market rally has been one of faith. Investors are betting big that reductions in regulations and corporate tax rates will have a huge positive impact on company earnings even if there is no clear sign that will happen.
Nick Colas, research director at brokerage Convergex, reckons every strong day since inauguration day has been the same basic recipe: “Take one-part new Administration with expansive plans to boost the U.S. economy. Add in 2 measures of a Federal Reserve confident enough in existing macro growth to boost interest rates. Add a dollop of money flows,” he said. “Seems perfect, but there is one thing missing: the analysts who actually cover companies and make earnings forecasts aren’t buying it.”
Colas supports his thesis with startling data from Factset, a research company that meticulously tracks Wall Street analyst coverage.
He’s right, earnings forecasts have actually fallen since last September. Current bottom-up 2017 analysis for the S&P 500 is $131.28 versus $134.50.
It’s not all glum. According to Colas, stocks can still rally. Eased regulations and lower corporate taxes may lead to much stronger profits. Upward earnings revisions may still come. The point is investors need to understand what parts are already baked in.
The secret to cooking well, he argues, is planning. Gather and prepare the ingredients. Read the instructions. Understand how it all comes together.
This is how Livermore worked. He knew the market is always picking winners early based on the entirety of known factors, and adjusting later if the assumptions don’t pan out.
The fact that larger companies are currently performing better than their smaller brethren would not have surprised him. Like the 1920s, they win because they are building market leadership and profit margin advantages. The playing field is not level.
Best wishes,
Jon Markman
