S&P 500 Company Sales Are Accelerating And Margins Are Expanding

S&P 500 company results for 3Q were really very good.  Let's review and discuss what this means heading into 2015.

Sales grew 3.9% on a trailing 12-month (TTM) basis. That is as good as analysts had expected. What is impressive is that sales growth is accelerating: a year ago, growth was 120 bp lower (2.7%; data in the next three charts is from FactSet).

Weekly Market Summary

Coming into this week, SPY had been above its 5-dma for 30 days in a row. This was a new record, unlike any streak the index has ever seen. We reviewed prior examples of these streaks earlier; our conclusion was that the streak rarely marked the top in the market, meaning there were higher highs immediately ahead after the streak ended. But the index also struggled in the following weeks, often trading lower (the full post is here).

The set up we had been looking for after the streak ended was the first touch of SPY's 13-ema. That has been a reliable buy point which we have highlighted many times in the past. That occurred on Monday, with SPY at 205.5. By Wednesday, SPY had already gained $2.50.

That may not seem like much of a gain, but consider the context. In the past 4 weeks (since November 10), SPY has gained $4, but more than $2 of that gain occurred overnight on November 21 following announcements from both the PBOC and ECB to provide greater stimulus. Without that one gap, SPY is up less 1% in the past month.

Overall, the trend remains higher for both the main US indices and well as for a majority of the individual sectors. All of the US indices except RUT made new highs in the past week; all of the sectors except energy have made new uptrend highs in the past two weeks.

December Macro Update: Employment Is A Notable Bright Spot

In May we started a recurring monthly review of all the main economic data (prior posts are here). At the time, the consensus view was that growth in wages and employment were accelerating and that this would soon lead to a meaningful increase in inflation above the Fed's 2% target. So far, this has been wrong.

This post updates the story with the latest data from the past month. Highlights:

• A bright spot is employment: NFP has been above 200,000/month since February, an unusually long period. Moreover, the 3Q14 employment cost index was the highest since the recession. 
• However, the inflation rate continues to decelerate. It's well below the Fed's target of 2% yoy.  
• Several measures of consumption continue to show demand growth of 2-2.5% yoy (real).  A sustained improvement in growth remains elusive.

Our key message has so far been that (a) growth is positive but modest, in the range of ~4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely. This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels.

With the latest data, our overall message remains largely the same. Employment is growing at ~2%, inflation and wages are growing at ~2% and most measures of demand are growing at ~2.5% (real). None of these has seen a meaningful and sustained acceleration in the past 3 years. The economy is continuing to slowly repair after a major-financial crisis. This was the expected pattern and we expect it to continue.

We'll focus on four categories: labor market, inflation, end-demand and housing.


Employment and Wages
The November non-farm payroll (321,000 new employees) was the highest since January 2012. In the past two years, NFP has only been above 300,000 once before, in April of this year. It was a strong report, especially since NFP has been above 200,000 every month for 10 months in a row.

Note, however, that the monthly prints are volatile. Since 2004, NFP prints near 300,000 have been followed by ones near or under 200,000 (circles). The November 2013 print of 274,000 was followed by 84,000 in December. Moving between extremes like these is nothing new: it has been a pattern during every bull market. The past 12-month average of 228,000 was in the middle of the last 10 year's range.

The Math Behind Oil Prices

The fall in oil prices is gathering much attention. Since mid June, light crude oil (WTIC) has fallen by about 40%. Current prices are the lowest since September 2009, more than 4 years ago.

You would guess that this would be bullish for equities. After all, a lower gas bill leaves consumers with extra cash for other purchases. So, lower oil should mean a higher SPX.

But that doesn't look like its been the case in the past. Since 2000, SPX (blue) and WTIC (black) have moved more or less in the same direction. SPX has risen when oil prices have risen, and fallen when oil prices have fallen.

Low Odds of a Big Fall in December

Bond yields are falling, as are commodity prices. Both NDX and RUT are starting December down more than 1%. Is a December swoon set to trigger?

Based purely on seasonal tendencies, the odds of a steep fall in equities through the end of the year are low.

According to the Stock Traders Almanac, December is the single best month for SPX (since 1950) and RUT and the second best month for NDX (post). Whether you look at the last 20, 50 or 100 years, December has averaged gains for SPX (chart from Bespoke).