Three decades ago, in October of 1987, Wall Street and the American public experienced "Black Monday," which to this day, remains the largest one-day fall for the stock market. Right now, however, conditions couldn’t be any more different. In today’s blog, we’ll take a look at why that is and how you and I can profit from today’s favorable environment…
In late September, Fed Chair Janet Yellen—whose term ends in February—acknowledged the possibility the Fed has misjudged inflation and labor market conditions. And based on the minutes from the September 19-20 Federal Open Market Committee (FOMC) meeting, members are divided on whether to raise key interest rates in December. Of course, the lack of inflation is behind this discourse. Hawks are calling for a December rate hike, while doves are arguing that inflation needs to approach the 2% level first.
I should add that Yellen is the biggest dove in the Federal Reserve. And if she wants to be re-nominated by President Trump—and I suspect she does—she needs to remain dovish. A continuation of the low interest rate environment would spur the robust economic growth President Trump is actively seeking.
Overall, I still expect the FOMC will raise key interest rates in December by 0.25%. Yearend rate hikes have become more commonplace for the Fed in recent years. The truth of the matter is inflation tends to cool in the fall due to slumping energy demand, and rise again in the spring due to increasing energy demand. Plus, the Fed figured out a little secret some time ago: Wall Street is often distracted during the holidays, so the Fed get less grief and criticism when they raise rates at their December meetings.
Regardless of whether a rate hike happens before the New Year, we’re still living in a time of historically low rates and remain in a "Goldilocks" environment.
That’s why the U.S. and global economies are continuing to firm up nicely. The U.S. economy is now growing at a 3% annual pace without any real signs of inflation. The International Monetary Fund (IMF) is forecasting 3.6% annual global Gross Domestic Product (GDP) growth for full-year 2017 and even stronger GDP growth for 2018.
On top of all this, the folks at Bespoke recently revealed October has been a good month for stocks for the last two decades. One key reason for this strength: earnings season.
October is one of the seasonally strongest months of the year. And this year, both the S&P 500 and Dow have been on a record-breaking tear with no major hiccups. In fact, both have tacked on 3.0% and 4.8% gains, respectively.
Now, the S&P 500’s third-quarter earnings growth estimates have been cut from 8.6% to 4.3% and most recently to 2.1%, according to FactSet. However, my Blue Chip Growth Buy List stocks aren’t characterized by decelerating third-quarter sales and earnings momentum. In fact, these stocks are characterized by 33.6% average annual sales growth and 119% average annual earnings growth. That means our Blue Chip Growth Buy List essentially has more than 27 times annual forecasted earnings growth of the S&P 500. And yet, it only trades at 22.1 times trailing earnings.
What’s even more exciting is that our stocks continue to lead the market higher. Since mid-September, our Buy List stocks have added an average 5.3%. That’s an incredible 77% beat on the S&P 500! And by Friday’s market close, we’ve had an average 11.4% earnings surprise among our stocks. Plus, our average Blue Chip Growth stock has had their consensus earnings estimate revised higher by an average of 10% in the past three months. If you recall, positive analyst revisions typically precede future earnings surprises. So I’m optimistic our stocks will continue to beat estimates and break out as market leaders.
But if you aren’t ready to join Blue Chip Growth today, I urge you to stay tuned into this blog, where I’ll stay on top of the biggest earnings news from this season.