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Trump's (Not So) Invisible Hand

Via ConvergEx’s Nicholas Colas,

Want to know why US stocks feel so fragile?  Perhaps we can blame Wall Street analysts.  Even after two months of market buzz about lower taxes, infrastructure spending and less regulation juicing investor expectations for better earnings growth, they refuse to bump their revenue or earnings estimates for 2017.

 

 

Our monthly look at revenue expectations for the companies of the Dow shows Street analysts still cutting their numbers for Q1 – Q3 of 2017.  About the only bright spot: they do expect revenue growth of 4.0% this year.  As far as earnings expectations go, there is still no change to “Bottom up” earnings expectations for the S&P 500 of $133/share.  That’s right where it’s been since before the election.  Nearer term, analysts are still cutting their earnings expectations for Q1 2017.  Now, markets are often happy to discount changes in Street expectations before they occur.  Current valuations of 17x – high by historical standards – may be a ceiling on equity prices until both buyside and sellside have more confidence in incremental earnings growth.  Next week – Trump’s first days in office – will be important in building that case.  First impressions matter, after all…

With just three days to go before the inauguration, we still don’t know very much about what will come after January 20th.  That uncertainty is creating the churn we’re seeing in capital markets.  After the year end 2016 run-up for risk assets, everything seems to have hit a wall.  On the other side of the barrier: a new administration that has made a lot of promises and will, naturally, want to start delivering just as soon as the clock strikes noon on Friday.

The largest unknown is just how President Elect Trump will prioritize and then negotiate the various pieces of his agenda.  And since Mr. Trump has no track record in government and a very unconventional approach to communicating his thoughts, investors have less information and more questions about the incoming administration than any prior transition.  It’s only a mild stretch to say that “Nobody knows nothing”, at least for a few more days.

Over the years we have written about two off beat personality indicators – digit ratios and birth order – and at this point we might as well toss those into the analytical bucket and see what they might tell us about Donald Trump and how he will adapt to his new job as the 45th President of the United States.

Here is some color on each:

Digit ratio is the relative length of a person’s second (pointer) to fourth (ring) finger. Feel free to look at your own hand right now. Is your ring finger longer than your pointer, or vice versa?  (Men tend to have longer ring fingers than pointers, and women the opposite, but many other factors play a role.)

 

Researchers have spent years looking at this ratio in the context of human behavior and found that people with longer fourth fingers than second fingers are more prone to risk taking than those with the opposite arrangement.  Here is an article on the topic if you want to read more.

 

There is even one study (cited +250 times in other academic papers) that correlates stock trading abilities with digit ratios.  It found that higher fourth/second finger ratios point to better performance.  You can read the paper here.

 

Donald Trump, for what it’s worth, has second/fourth fingers of almost identical length, meaning that by this measure he is not naturally inclined to risk taking.  You may recall some discussion of his hands during the primaries, and as a result there are many pictures of them available online.  There is also a hand print at Madame Tussaud’s in Times Square.  The evidence is clear: his second and fourth fingers are of roughly equal length.

 

Birth order. Are you an only child?  A first born? A later born?  The answer may help explain a lot of your personality traits.  First borns, for example, tend to feel comfortable supporting the status quo.  Growing up, after all, they had the more privileges than later-born children in the same family.  Conversely, later-born kids may end up revolting against established societal rules since in childhood they felt disadvantaged relative to their older siblings.

 

Now, this is a controversial theory, with plenty of research work done both to support and disprove the idea.  The best thing you can say about it is that (with few exceptions) everyone is an only, an older, or a younger child in a family.  Draw your own conclusions about what that might mean.

 

Donald Trump is the fourth of five children, with nine years between the oldest born and his spot in the birth order.  The first born in the family is Maryanne Trump Barry, now a retired Federal judge.  Next in line was Fred Jr, a gregarious airline pilot who died at a young age from alcoholism.  Elizabeth comes next in the birth order, followed by Donald.  Last in the queue is Robert, best known in NYC circles for an incredibly messy divorce in 2009 from then-wife Blaine.

 

Does that make Donald Trump a natural revolutionary?  Perhaps.  Birth order theory is still a work in progress.  You can read more about it here.

Shifting back to the relative terra firma of capital markets, we can say that even if Donald Trump had been a first born with a longer ring finger investors would still want the next few days to fly by as quickly as possible.  If “Buy the rumor, sell the news” is a long held Wall Street aphorism, it still doesn’t address what you should do between the first and second parts of that saying.  And that’s the position we find ourselves in now.

One problem with the post-election rally is that US equity markets have run out ahead of the earnings expectations.  Every month we look at what brokerage analysts have in their financial models for revenue growth inside the 30 companies of the Dow Jones Industrial Average as well as what FactSet’s data is showing about sales/earnings expectations for the S&P 500 companies. Our data is below…

The latest FactSet Earnings Insight report is available here.

A few points here:

  • Analysts are clearing waiting for specifics about incoming President Trump’s agenda, and how Congress responds, before changing any of their financial models.
  • FactSet’s data shows that Wall Street analysts haven’t really budged off their $133/share earnings number for the S&P 500 for 2017. That is essentially the same number they had in October of last year, although it declined slightly to about $132.50/share in mid-November before bouncing back at the end of last year. (Page 20 of the report we cite above.)
  • FactSet also shows that analysts are still cutting their Q1 2017 estimates even as consumer confidence has taken a bit of a post-election bounce and overall Q4 2016 estimates remained static. (also Page 20)
  • As compared to estimates from September 30, FactSet reports that analysts are slightly less optimistic about 2017 earnings growth now versus then (11.4% versus 11.5%), even though they are a bit cheerier about potential revenue growth (5.9% then, 6.0% now). (Page 17)
  • Our own data from Street estimates for the 30 Dow names shows a similar trend. Analysts are cutting their revenue expectations, most recently to 4.0% on average.  This compares to almost 5.0% expected growth just before the election last October.
  • The same trend is in evidence for Q1 and Q2 2017, where analysts now expect just 5.7%/3.7% growth versus +8%/+4% last October.

Now, capital markets are not always beholden to what Wall Street analysts print in their models.  If investors believe in future revenue and earnings growth they are happy to run out ahead of the Street.  The problem here may well be as simple as valuations.  At 17x earnings, US stocks already discount some improvement in earnings (most of which was expected no matter which candidate won the presidency).

It may well be that markets simply need to see what happens after the clock strikes noon on Friday.  The bright spot is that none of what President Elect Trump has promised/proposed is yet in any Wall Street numbers.  As those measures come into tangible existence, equities should respond.

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