Every year, like clockwork, analysts trip all over themselves to raise numbers for the coming 12 months, creating new high bars and price targets that get portfolio managers juiced for the occasion.
The annual number boosts, both top and bottom, come naturally to these crowd followers who love to ratchet price targets up when stocks ramp -- and down when stocks cascade.
They always want to start off the year with a bang.
They didn't do it this year, though. They kept their tongues. Oh sure, they rolled their price targets DOWN, in keeping with how poorly 2018 went out. But rather than try to put a positive spin on the year, they just dispensed with their ritualistic, first-month-of-the-year bullishness and stayed in their foxholes.
There was just too much shelling for them to peak out and see if things could be getting better. When they did come out, it was in conjunction with fourth-quarter earnings, in which every year, like clockwork, analysts trip all over themselves to raise numbers for the coming 12 months, creating estimates that get portfolio managers juiced for the occasion.
I think we are seeing now the fruits of that fear. We are seeing companies beat expectations that were set when we still felt the world was going to come to an end.
We are seeing expectations being clobbered because they were never raised to begin with. We all accepted that the first-quarter reports would be nasty. How could they not be after what the Fed did at the beginning of October. That plus the escalation of the trade war through the hard words of Vice President Pence left portfolio managers no choice but to cut and run.
The analysts may have been trend followers, but the CEOs sure weren't. They were taking the Fed pause and the commodity inflation peak to turn in some much-better numbers -- at least so far.
Playing the Same Tune
As we get one company after another report, we are hearing pretty much the same tune from so many companies:
- Free cash flow is incredibly strong, so strong that companies almost all bought back more stock than we expected -- shrinking the denominator, growing the EPS and producing big surprises.
- China, after being a really worry at the beginning of the year, is now one of the strong points for 2020. Any company that does business there saw an uptick, including outfits like Nike (NKE) and United Technologies (UTX) . China's gone from a surprising negative to a shocking positive in three short months.
- Domestic consumer companies are still reaping the positives from strong employment, yet not too strong that wages are going up too fast.
- More importantly, and this is really starting to dawn on portfolio managers, we have seen the peak in raw costs as well as in freight expenses. But what we haven't seen is the peak in prices to the consumer. They are still being raised -- and the prices are sticking, because employment is so bountiful that they can get away with it.
- Three months ago, many managers were betting that it was a matter of time before the Fed put through a rate increase or two. Now, despite some strong jobs data, there's still plenty of people who believe the next move will be a cut in rates. As long as there is a split on this key issue, then it's dangerous to have too much cash on the sidelines.
So, chalk up this march to all-time highs to the downbeat nature with which the year began. When the Fed is about to tighten multiple times and earnings are falling off a cliff and a trade war is running hot, you need cash on the sidelines. That's how we came into the year. But with the Fed possibly loosening, earnings hanging in there and a trade war possibly winding down, you need every penny in the market that you can get in the market. And that's just what we are getting.