The Market on Methadone: How You Can Avoid the Crash

22.11.2016 • The Economy

By Kris Sayce – Port Phillips Insider (Australia) –

Now let’s get back to those sky-high US markets.

Despite the bullishness on Wall Street, are we still worried about a potentially major and disastrous stock market crash?

Channelling our inner Sarah Palin, ‘You betcha!’

During the last quarter, US companies as a whole reported the first quarterly rise (barely) in earnings since 2014.

But as the familiar chart below shows you, analysts’ earnings forecasts are still a long way ahead of actual earnings.

As a refresher, the white line to the left of the green line records actual earnings results for the US S&P 500 index. The white line to the right of the green line shows forecast earnings.

In order for the S&P 500 to hit these forecasts, earnings have to rise 18.7%. That’s a tough ask when you consider earnings are down 2.3% over the past year, and were up just 0.57% over the last quarter.

So, we’re not buying the euphoria.

We’re also sceptical when we look at the earnings forecasts for the component companies of the Dow Jones Transportation Average. Check out the earnings chart below. It’s in the same format as the chart above:
Far from being bullish about earnings, analysts covering Dow Transport stocks are decidedly bearish.

If we believe analysts are overly optimistic when it comes to S&P earnings, we should apply the same tone of caution here. In this instance, we would proffer that while bearish, analysts aren’t nearly bearish enough.

It’s no doubt why the Transportation Average has lagged the Dow Jones Industrial Average in recent years.

Why do we pay attention to transportation stocks? Simply because shipping, airline, and road transport companies can provide a clue to the real health of the economy.

Even in a digital economy, companies need to ship things to the end user. Even if people buy from rather than from Target or Woolworths, it still involves the shipment of goods.

If goods aren’t moving, then folks aren’t buying.

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