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Another Naïve Narrative

Human beings like telling stories.  Before writing, it is how we passed down our very own history.  Stories pique our imagination and help us understand what is going on in the world, however, it is often an oversimplification we tell each other and ourselves.

Narratives drive the media cycle, whether its sports, politics, or financial markets.  What is confusing is how sure commentators are that their “hot takes” on the headlines are true without much to back it up.  In sports, we have former players giving pre-game gut predictions and still showing disdain for analytics (the Moneyballcrowd).  In politics, the ‘old media’ is not on board with Nate Silver’s algorithm using polling data for election predictions (even though he predicted 50 out of 50 states in the last presidential election).  Charlatans hop on financial TV that looks more like ESPN’s Sportscenter than any other show and explain what exactly drove price movements today or even the last hour.  China? The Fed? Black box trading systems gone haywire? Or something we will not know about until a few months later?  I won’t pretend to have the answers, but we will examine the data on equity markets across regions and sectors.

First up, fundamentals, where today we zoom in on earnings growth.

In our analysis, there is only one country with positive earnings growth expectations for the next 12 months – Japan.  Abenomics, with its one-two punch of monetary policy and fiscal policy, is having a positive effect on the bottom line for corporations in Japan.  Trailing U.S. earnings have gone negative over the last twelve months and are expected to fall slightly going forward.  Emerging market earnings accelerated the pace of losses last quarter and expectations were only lower for growth in late 2008-09.

From a sector perspective, we will look at the trailing 12-months.

As you may have guessed, with the price of oil falling from over $100 to the $40 range in the past year, oil and energy related companies have cut earnings in half.  On the bright side, healthcare, technology, consumer discretionary, and even financials actually grew earnings on a global basis.

Next up, trend.  The table below shows momentum scores from an absolute and relative basis to both history and the overall market.

Japan is again ahead of the pack while emerging markets the laggard.  Healthcare is leading sectors while energy and materials are both at the bottom and some recent flips to neutral for consumer sectors.

Finally, we will take a look at valuation using basic price to earnings ratios.

We scale Japan on the right hand axis since its history of being in the 30s tends to visually mess up the graph.  It shows that relative to the last 10 years, Japan’s P/E multiple is pretty low at 16, especially with accelerating earnings and strong positive momentum.  Emerging Markets are on the left axis and trade at 13 times earnings, while the U.S. market peaked at 21.5 earlier this year and remain at about 20.

It is difficult to look at ten sectors on a graph without the data getting too noisy, so I will point out a few items.  On the rich end of the spectrum, the global healthcare sector tagged 28 and consumer staples hit 25 times earnings this year, the latter being its highest since 1999.  With falling earnings in the energy sector, there must be expectations of a bounce back as the multiple sits at 16.6.

Many analysts argue that more risk is ahead for asset markets, while others believe the mini-crash is over as bearish sentiment is very high.  In the short-term, there is historically serial correlation for volatility, a fancy way of saying ‘market volatility tends to beget market volatility.’  Yes, it is not very insightful but it helps to set expectations rather than listening to the narrative of the day.

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This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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