Cumberland Advisors Market Commentary – Year-End & 2020 Forecast Note #2: A Vulnerable Trajectory for Stock Prices

Author: David R. Kotok, Post Date: December 4, 2019
image_pdfimage_print

In addition to Trade War uncertainty, US stock markets must grapple with problematic earnings estimates for 2020. Typical year-start estimates are higher than actual outcomes, as a bias toward optimism appears around the year-end holiday time. A good example is 2019, when year-start estimates for the S&P 500 were in the $174–178 range. The actual result for 2019 is more likely to be $162–164.

Market Commentary - Cumberland Advisors - A Vulnerable Trajectory for Stock Prices

The 2020 US stock market outlook depends on economic growth worldwide. And continued growth depends on the outlook for a Trump Trade War ceasefire and on a lack of serious financial shocks (like a breakdown in American CLOs or credit deterioration of many countries’ junk bonds or Chinese banking system risk). In the absence of shocks, the market is pricing an approximate 19 price/earnings multiple on the S&P 500 Index.

Consider the equity risk premium with a 19 or possible 20 multiple. The earnings yield would be about 5%. There would be no margin for any shocks or any errors. Without the shocks, a higher trajectory for stock prices can continue and be sustained. Any shock calls that assumption into question. One can argue that the benefit for stock prices that is attributable to low interest rates has run its course.  In fact, we see lower rates or negative rates a threat to the stock market.

If we are correct in that assumption, the engine for higher stock prices depends on higher earnings and positive earnings surprises. Will we see them?

Our friend Christopher Whalen has penned a superb analysis of the banking sector, titled “Four Charts: US Bank Earnings Are Falling.” Here is the link: https://www.theinstitutionalriskanalyst.com/single-post/2019/11/30/Four-Charts-US-Bank-Earnings-Are-Falling. If Chris is correct, the banking sector must experience zero shocks if it is to sustain a flattening earnings trend.  Note that Cumberland is underweight large banks; we’ve taken the profit in that position.

Other sectors have different levels of exposure. We will talk about them in future year-end and 2020 forecast commentaries.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Read the full series of “Year-End & 2020 Forecast Notes” by David R. Kotok at this link (updated as they are published):
https://www.cumber.com/cumberland-advisors-market-commentaries-year-end-2020-forecast-notes-by-david-r-kotok/


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

cumber map
Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.
Loading...