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Jurrien Timmer

21 May, 10 tweets, 3 min read

Eye on earnings: Back in 2009-10, the market corrected 16% even though earnings growth was finally coming through. It's a good reminder that the market always looks ahead; at times of rapid earnings growth, the price reaction can seem counter-intuitive. (THREAD/1)

The same thing seems to be happening now. Could the earnings picture look any better? Q1 earnings season is pretty much wrapped up and the growth rate has soared 27 percentage points since the start of earnings season. /2

Compared to the typical cycle, earnings are out-performing, and therefore so is price. /3

Valuation levels are much higher than average (compliments of low interest rates, a high payout ratio and ample liquidity), but the change in the P/E ratio since the price bottom 14 months ago is very much consistent with history. /4

We know that over the long term, stock prices have a near-perfect correlation to earnings. Price follows earnings. But price also leads earnings, given that the market is always discounting all known information. /5

And what the markets are now discounting is a full recovery for earnings and the economy. As a result, the strong earnings data is likely mostly priced in. /6

This next chart illustrates: It’s a scatter plot of the Z-score of earnings (horizontal) vs the Z-score of the S&P 500 total return (vertical). /7

Note how the tails seem counter-intuitive: very negative earnings growth has a positive slope against price, while very positive earnings growth has a flat slope. In the middle is where the relationship holds. Positive earnings growth are correlated to positive returns. /8

A less-trippy version of this chart is below. The positive correlation between price and earnings happens in the middle part of the bell curve distribution. The left tail produces an inverse outcome and the right tail produces no clear outcome. /9

The implication of all this? The earnings news is great. I believe it is likely to continue that way. But it’s reflected in the price, and history shows that unsustainable earnings gains tend to not get rewarded. /END

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More from @TimmerFidelity

Jurrien Timmer

@TimmerFidelity

19 May

We can see “inflation fixation” playing out in the markets. Value sectors like energy and financials are positively correlated to interest rates, which are either rising now or are expected to rise in the future if inflation expectations become entrenched. (THREAD/1)

While the relative performance of small caps vs large caps peaked right in line with the peak reopening of the economy (purple bars vs blue line below), the value/growth ratio has continued to gain in line with this inflation narrative. /2

This next chart shows the 52-week correlation between various sectors and the 5-year Treasury yield. /3

Read 4 tweets

Jurrien Timmer

@TimmerFidelity

18 May

https://twitter.com/TimmerFidelity/status/1394752676412465153

Building on the previous thread: The “inflation fixation" dominating the news right now is driven in part by supply shortages (be it labor or materials), but the fact is that none of us really knows the answer to this riddle yet. (THREAD/1)

https://twitter.com/TimmerFidelity/status/1394752676412465153

While some companies have announced higher pay to lure minimum wage workers back, the labor backdrop today couldn’t look any different from the inflationary 1970s. /2

The chart below shows inflation metrics and labor trends. With the labor force barely growing and union membership near historic lows, it’s not clear to me where the secular wage-driven inflation creep is going to come from. /3

Read 4 tweets

Jurrien Timmer

@TimmerFidelity

18 May

Welcome to the inflation fixation. Judging by all the headlines and most of the media interviews I’ve done lately, inflation is what everyone is talking about these days. So where is it headed? Let’s consider the question of “creep”: (THREAD/1)

Many economic indicators appear to have reached their peak rate of change about a month ago, but after the 4.2% spike in April’s headline Consumer Price Index as well as the non-farm payroll miss, the inflation narrative is trending. /2

Beware inflation creep: If the current spike in the inflation rate reverses but stops short of retracing all the gains, the end point will be higher than the starting point. If that cycle repeats, inflation creep will have set in. /3

Read 7 tweets

Jurrien Timmer

@TimmerFidelity

14 May

It’s my take that we’ve been in a secular bull market since May 2013, when the S&P 500 finally hit a new all-time high after a decade of sideways action, which included two major 50%-plus drawdowns. So what lies ahead? (THREAD/1)

Here’s the super long-term trend for the inflation-adjusted S&P 500 total return index since 1871. Historically, the market tends to swing around this central trend line like a pendulum. The pendulum is always in motion, like the tide. /2

At the 2009 secular low, the SPX was 47% below the trend line. It is currently 42% above. At past secular bull market peaks (1968 and 2000), the index was about 100% above trend. Therefore... /3

Read 5 tweets

Jurrien Timmer

@TimmerFidelity

13 May

Predicting inflation trends isn't simple these days. Before this century, whenever the money supply soared, inflation tended to follow. However, the pattern hasn’t continued since the 2000s. (THREAD/1)

Why doesn’t inflation always track with money supply anymore? Demographics. Whatever inflation seeds are being sown by policy makers need to overcome powerful demographics-induced deflationary forces. /2

Here’s the same chart with the growth rate of the US labor force added in the bottom panel. See a pattern? When money growth was rampant during the '70s, the labor force was growing. Now money supply is growing fast again, but labor force growth is declining. /3

Read 5 tweets

Jurrien Timmer

@TimmerFidelity

12 May

The cyclical inflation we are seeing in the economy now is causing commodities to soar, as this chart shows: (THREAD/1)

The new bull market for commodities appears to come at the exact right time from a long-term, super-cycle perspective. The low in the Commodity Research Bureau (CRB) Index last year was perfectly timed in terms of the long cycle. /2

Will it last? The commodity super-cycle chart above certainly suggests so. And when we consider the current fiscal/monetary environment, we can imagine why this could go on. /3

Read 4 tweets

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