“Time is your friend; impulse is your enemy.”

~ John Bogle

Good Morning,

We sure hope everyone had a relaxing Memorial Day weekend for sure.  While everyone was giving thanks to those who have protected the foundations of our freedoms, every indication highlights that there was much movement around the country, unlike last year at this time.

That is good news – and given the steadily-increasing activity, the growth data should also continue to expand in the weeks and months ahead.

Indeed I suspect (just a hunch) that the normal slow volumes of summer will set on even quicker this year – as last no one could leave to go anywhere.

There is a high likelihood that many experts still do not grasp the internal forces yet to be released as the engine of our economy sparks back to life.

Pre-Summer Review

Ok, so we wanted to thank (again) everyone who took the time to join us late last week on Zoom for the “pre-summer review.”  It was designed to provide an overview of things we might consider as the summer months of haze unfold.

Not Much New

There has been much data shared in the morning notes these last few weeks as growth takes hold in almost every area of the economy.  As such, the firehose of information from the media will likely pause for a few weeks as the market preps for yet another earnings season.

The Q2 releases will kick-off in mid-July and carry us into the third week of August.  The inflow of adjustments hitting the expectations chart continues to be, well, “better than expected.”

Here is the latest from Refinitiv:

The “forward 4-qtr estimate” as of Friday, May 28th was $190.94 vs. $190.50 last week and – get this – just $159.02 as of 12/31/20. The forward estimate has jumped $30 since December 31, a record setting change.

The S&P 500 earnings yield on the forward estimate is 4.54% vs. 4.58% last week and 4.23% as of 12/31/20.  In other words, both values and yield have risen.

The upward revisions to the quarterly growth rates for 2021 indicate that the EPS and revenue growth rates continue to get revised higher.

On a graph, it is unfolding like this:

Let’s Summarize

For those who do not like all the data points, a summary is in order:

First-quarter earnings reports are ending.  They were shocking to almost everyone inside Wall Street – except you.  A record 85%+ of companies reporting, beat prior estimates while also increasing their forecasts for 2021.

Many companies increased their dividends and initiated stock buybacks again too.

The explosive “increasing margins” theme we have covered since last summer is escalating.

It is highly likely we will witness increases in operating margins to well above 12% in 2021 and closing in on 13%+ in 2022, up collectively between 125 and 225 basis points from levels seen in 2019, before the pandemic.

S&P earnings run rates may even hit $200/per share in 2021 and could exceed $218-$222/share in 2022.

Recall those levels are up from the $140/share seen in 2020 and $163/share experienced in 2019.

Like we have said for years now – the 2020s and 2030s are the 1980s and 1990s all over again, on steroids.

Mix in the explosive productivity and change forces of technology and you get a world that looks a lot more like Star Trek, far sooner than you may have previously imagined.

Not All a Bed of Roses

Many still are not comfortable recognizing that setbacks are a requirement for future gains.  There must be potholes of perceived risk along the pathway for the pathway to keep pointing you “up the mountain”, if you will.

Hoping for everything to always be easy is a mistake.  Easy does not = gains.  Easy creates little to no return – like cash in the bank.

As such, EXPECT that somewhere during the summer haze ahead we will get all sorts of chatter about “the swoon.”  It will permeate every area of discussion.  The higher prices edge up, the scarier it will feel and the louder the experts will get.

A summer swoon, after running a bit higher from here, would be perfect. 

Like I have stated often – “give me 2-3 weeks of red ink and I will show you a crowd that is as afraid as they were 30,000 DOW Points ago.”

It is ALL part of summer. 

Take it as a package deal.

Fretting over it denies the reality that “it” is required.  Every window of risk, setback, correction and pause is part of the equation which builds your future return.

Remember – it is never about what’s now – it is about what’s next.

Consider This:

In your view replay above, we cover how long we have been in a trade range.  Markets are basically where they were in early April.  Churn has been evident but the underlying strength continues to improve.

While fear has risen dramatically and cash has leapt to the sidelines again, note the image above shows that the advance/decline line has hit new all-time highs.  These are historically pre-cursors to higher prices.

The point?  Simple:  Fear continues to set the stage for the next very surprising leg upward – allowing for the summer haze.

Buckle Up

Markets pay for patience and discipline.  They pay for fighting the emotional surges that plague so many results over time.  They pay for believing in the future ingenuity of this country and the people in it.  They pay for having faith in your plan and the forces that built our lives together.

This “fight” to recover – like all previous Armageddons – will pass with time.

In the end, there is no end, really.  Just a continuation of time (your greatest ally) and the trek up this very high mountain ahead.  There will indeed be treacherous spots and perilous moments that will terrify many.  It will be our job to keep one focused on the long-term current driving us all forward.

That said – the tectonic shifts ahead are massive. 

We have stated this many times over and at the risk of sounding too darn boring, here we go again:

The leverage of change and the Generation Y technology waves ahead are creating massive changes in margins.

Earnings will be far more leveraged and see many more benefits than currently understood.

The pandemic shutdown had one benefit:  if a company was not killed in the pandemic, we would argue it is now “unkillable”.

The armor created, the tools built, the technologies unleashed, the systems implemented and the capital invested during the shutdown storm has set the stage for a complete remake of all that we “know” – and the Q1 numbers are just a tiny glimpse into that benefit.

The Bottom Line

This chop during May proved its value:  New doubts, many new fears and new monsters are all forming bricks in the new foundation being built for the next leg up as the spring dawns and the US builds into its “new normal.”

All capped off with even more cash on the sidelines, better earnings, higher results and a strong platform from which to build.

So what now?  Cinch that belt tighter.  And grab your popcorn.

The pace of change is going to be head-spinning – with plenty of gut-wrenching interruptions along the way.

Get comfortable with this process…as it is set to be with us, forever.

We must all remain diligent and prepared to always stand tall against the storms.  Standing apart from the crowd permits one to always be ready to do what most will not.

And remember, problems don’t come to stay – they come to pass. 

You’re missing out!

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