Stock Market 2020 [Data Reveals Where the Market is Going]

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The stock market is on FIRE lately but where’s it going for the rest of 2020?

In this video, I’m sharing my favorite investing tool to show you how to invest for the rest of the year. We’ll dig into some professional-level stock market data for the risks and returns in 2020.

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My Favorite Resource for Stock Market Analysis

Nation, nothing seems like it can keep the stock market from heading higher but in my experience as an equity analyst, that’s when the risk to your investments is the highest.

And it’s times like this that it helps to look into the data to give you an idea of those risks and a direction. So I wanted to use today’s video to share one of my favorite resources, I’ve used this tool since my days as an analyst, it always helps focus my strategy and it’ll help you put together a better stock market forecast.

FactSet puts out this Earnings Insight download, usually every couple of weeks and more frequently when stock market earnings are being reported. It’s a great look into the stocks in the S&P 500, how sales and earnings are coming out and can tip you off to problems in the market.

And the most recent report is really easy to find, you just go to Google and type in, Factset Earnings Insight. The most recent report is almost always going to be the first result, it’ll be a pdf that you can download a copy or just view online.

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Decoding the Stock Market in 2020

I want to scroll through the most recent and show you what stuck out to me and use that to give us some ideas for the stock market in 2020.

Companies are now reporting their earnings for the fourth quarter so we’re getting a crucial look into that holiday period for companies and how it drove profits. Remember that stocks are an ownership in a company’s earnings so this is ultimately what you own when you invest in a stock and you want to see this number growing.

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And this highlight for the earnings growth rate immediately hit me like a sack of doorknobs. This says that earnings are 1.9% lower over the last year and companies have been reporting this kind of earnings growth for a full year!

So even though the market is booming higher, profits at these companies are shrinking. Now we’re not in a recession yet and the market can go still go up with a little profit weakness but this is a huge warning sign.

If we scroll down a little, Factset always has a topic of the week in which the go into a little more detail and this week is a great look into how expensive stocks are right now.

So Factset shows you the Forward Price-to-Earnings ratio here. Most investors are used to seeing the price-to-earnings ratio, that’s a stock’s price divided by the earnings, so a measure of how much investors are paying for each dollar in a company’s earnings. But you’re usually seeing this on a trailing basis, so the earnings a company has made over the last year.

This Forward P/E ratio is instead taking what analysts expect the companies to earn over the next four quarters so it’s a little different measurement. It still shows you how expensive a stock or the stock market is but its ASSUMING that analyst expectations for market earnings are going to be pretty close.

And here we see that the stock market is at its most expensive going back to 2002, we have to go back to the tech bubble for a time stocks were more expensive.

The stock market as a whole, again measured by that S&P 500, is trading for 18.7-times those expected earnings. Factset also tracks the longer-term averages so we see here that the 10-year average P/E is 14.9-times and the 20-year average is 15.5-times.

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So comparing the current price of stocks, that 18.7-times PE ratio, we find the market about 25% more expensive than the longer-term averages.

Put another way, stocks would have to fall by more than 20% for them to be considered around their fair value and I’d argue maybe even down 30% or more to be considered a good value!

You see in this chart the graph of that forward price-to-earnings ratio for the stock market, so the highest it’s been since 2002, and I’ve highlighted a point above. Something we’ll talk about later, despite the fact that companies are reporting declining earnings, analysts have really high expectations for 2020 earnings. Now I’m not going to say my analyst brothers and sisters are full of shit but I do think there are some problems here with forecasting higher profits.

This chart shows that PE ratio by stock sector and you’ve got some really interesting info here. We just finished up our 13-video series on the best stocks in each sector and I love taking the data to show us where the best opportunities are in each group.

So here we have the dark-blue line is the current PE for each sector against the lighter-blue which is the 20-year average. And you see some sectors are wildly expensive like Utilities and Materials. If you take the current PE of the utilities companies, 20.5-times earnings, against that longer-term average of 14.4-times…that’s 42% more expensive now than the sector usually is!

On the other hand, you look at the right side of the graph and some of these sectors like Energy, Healthcare and Financials are all much closer to their long-term PE averages.

So using just this chart, you get an idea of how expensive each sector is and maybe, just maybe the relatively safer stocks if the market gets into trouble.

You’ve got the sectors that are relatively cheap; so that Energy, Healthcare and Financials that won’t have as far to drop in a crash. Then you’ve got something really interesting here with consumer staples, which is 21% more expensive than its average, and that Utilities Sector.

These two are usually what you would think of as safety stock sectors, right? You would expect utility stocks to do well in a recession or market crash because revenues and profits are going to be fairly stable…but, BUT, if these stocks are already trading at 42% more expensive than they normally are, they’ve got a long way to fall before they get to any semblance of fair value.

Now if we do get a recession then interest rates will fall and some of these utility stocks and staples might still do ok but there’s definitely the risk that these two sectors most investors are counting on as ‘safety’ in a crash, that they won’t quite be the safety you expect.

Scrolling down and we see more detail into the market earnings for the quarter. This says that if companies in the S&P 500 report an earnings decrease for the quarter, and it’s pretty much guaranteed they will, it will be the first time the market has had four consecutive quarters of profit losses since the 2015/2016 period. Now if you remember, stocks were basically flat for the entire year and a half from beginning 2015 through mid-2016, so when earnings aren’t great, stocks don’t usually do as well as they have been lately.

Something else that really stuck out to me was this revenue growth. So sales for companies in the S&P 500 aren’t doing too badly with 2.9% growth expected for that 4th quarter. Now what’s surprising about this is that companies are making more revenue but not able to translate that into bottom-line profits.

That’s a big red flag for me. It means either costs are going up, so operating costs are increasing and hitting profitability, or taxes or interest costs are going up. Well we know taxes and interest costs aren’t increasing so we want to take a close look at operating costs, especially general wages and materials costs to see what the problem is here.

You’ll find a lot of detail on earnings within each sector throughout the report but I want to scroll down to the market forecast section. Here we see the stock market earnings analysts are expecting for each quarter this year and all of 2020.

So here despite the fact that earnings for companies in the stock market only increased by 0.2% in all of 2019, analysts have some pretty rosy expectations for 2020.

For the first quarter, analysts expect companies to report earnings and revenue growth of 4.3% and this is all on a year-over-year basis so the first quarter 2020 versus the same quarter 2019.

If you look at the other quarters though, analysts expect revenue to increase a little up to growth of 5.9% in the fourth quarter. But they expect bottom-line earnings to just explode higher, as high as ten- and fourteen-percent in the third and fourth quarter.

In fact, for all of 2020, stock market analysts expect earnings to be 9.5% higher while revenue grows by about half that at 5.2% year-over-year.

This is where I have a problem. First is you have to believe that profitability will turn around and start increasing. If you’ve only got revenue growth of 5%, so top-line sales, but think those bottom-line earnings are going to be 10% higher then that means companies will be able to cut costs or use greater financial leverage or really boost their share buybacks.

Now interest rates are low but most companies are already borrowing as much as they want so I don’t think they get there with more leverage. Share buybacks dropped 15% last year and are expected to drop another 5% in 2020 so it doesn’t look like that’s going to boost the bottom line earnings per share either.

So how do analysts think companies are going to cut costs so much as to increase earnings by twice their sales growth? Historically low unemployment means wage pressure is going up, not down. I just don’t see this big increase in profitability and that’s a big potential for disappointment in the market.

So I want to jump ahead a little and look at this chart. This is the market earnings actual and expected. We see that companies are expected to report about $162 per share for 2019, pretty much flat from 2018, but then we see that big jump, 9.4% higher to $177 per share in 2020.

And on this, the S&P 500 is trading at about 3350 or that 18.9-times forward earnings. But…what if those earnings are only 5% higher, so the market reports earnings of $170 per share. Then we see the market is actually trading at almost 20-times earnings…that’s expensive!

Factset also surveys analysts for their stock market price target and we see here expectations for about 3528 on the S&P 500 by the end of 2020. Now if we look at where the market is, at 3337 already, that only leaves about 5.7% for a gain on the year.

Now analysts can be wrong, hell, they often are, but basically what this is saying is that for all this risk. For as expensive as stocks are already, even if those high earnings expectations come out rainbows and unicorns, those analysts only see about a 6% upside for the year.

Another theme I want to point out, and this is something we’ve seen develop for much of 2019 is the difference between companies that get most of their sales from inside the United States versus those with a more international business.

The green bar here is companies with less than half their sales in the U.S. whereas the light-blue then is companies with MORE than half their sales domestically, here in the states. So this first chart is earnings growth for the fourth quarter and companies with a more international business are expected to see a 4.4% decline in profits. Those with most of their business inside the U.S. though, only expected to see a half percent decline in profits.

Same picture here with revenue growth. Companies with most of their business outside the U.S. are expected to book lower sales, down 0.4% compared to last year. Companies with most of their business in the U.S., expected to book 4% sales growth in the quarter.

So what we’ve been seeing is, because of sluggish growth internationally but that stronger economy here in the United States, companies with a domestically-focused business have done better.

A chart here that ties in really well with what we were talking about earlier, how falling profitability has meant even decent sales growth has still meant declining earnings. This chart shows the net profit margin for the market, so that bottom-line profitability with the dark-blue line being end of year 2019 and the grey being end of year 2018.

And we see that most of these sectors are seeing falling profitability. Profitability in the real estate sector was 34.2% in 2018 but fell to 33.4% last year. Tech stocks booked profitability of 22.7% in 2018 but that fell to 21.7% in 2019.

In fact, only three of the 12 sectors saw their profitability increase last year. That’s Financials, Utilities and Materials.

So there are a lot of negatives here or maybe I’d say risks but just an expensive stock market usually isn’t enough to send everything into a crash. You might get a five- to ten-percent selloff but it isn’t really a crash-catalyst like say the Fed raising rates would be.

BUT there is a crash catalyst that I don’t think the market is paying enough attention to and it’s the recent Coronavirus. Granted it’s not a global epidemic but this thing hit China at the worst possible time, just before the Lunar New Year when everyone was thinking about traveling and spending money…it pretty much shut China down for business.

The virus is going to knock off at least a few percent off first and probably second quarter economic growth for the world’s second-largest economy. And while these kinds of scares usually mean a bounce-back in later quarters, it could be the tipping point that sends the global economy into a recession.

We were already seeing a record in loan defaults around China. The shadow banking market is on edge there and some of you remember the huge drop in Six Flags last quarter when they announced the Chinese manager had defaulted on its loan.

So what I’m worried about is that these very rough two quarters for the Chinese economy become the catalyst for a financial crisis in the country and just a domino effect all over the world.

Now I wanted this to be mostly a resource video, show you the information and let you decide your own stock market forecast for 2020 and how you wanted to play it. But I can share how I’m playing these risks and trying to make money as well as protect myself this year.

First is I’m holding a lot of cash, bonds and real estate. Normally I would have maybe 5% of my money in cash, 15% in bonds and twenty- or twenty-five percent in real estate.

Right now though, I’ve got 25% of my investable assets in cash, 20% in bonds and that 20% in real estate, so about two-thirds of my assets outside the stock market. And we’re seeing this in a lot of hedge funds and private equity funds right now. Warren Buffett’s Berkshire is sitting on $128 billion in uninvested cash. TIAA-CREF, one of the largest pension funds in the U.S. is sitting on about 30% cash right now.

Second is I’ve also sold covered call options on a lot of my stock positions. Those of you in the nation will remember our option investing video a couple months ago where I put $25,000 in share of Uber and Pinterest. But to hedge the risk in those, I also sold call options at a higher price so I collected some cash on the investment.

Third here, I’m also positioning in some of those relatively less expensive sectors like energy, healthcare and financials. Now that’s not to say these three sectors won’t get hit in a stock market crash but since they’re already fairly cheap, they don’t have as far to fall so might not do as bad as the rest of the market.

The stock market is sending a lot of warning signs for 2020 and investors need to be careful. This isn't about timing the market but about knowing where everything is pointing and how to be ready!

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