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Market melt-up left stocks vulnerable to a sharp reversal

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This relentless rally has carried the S&P 500 more than 9% higher between October 2 and the end of November. The index hit 11 record highs last month alone — in just 20 trading days. Selloffs were virtually nonexistent as investors, afraid of missing out on the fun, stampeded back into stocks.
Melt-ups feel good — at least for those invested in stocks. But because they aren’t built on fundamentals, they make markets vulnerable to sudden pullbacks. Nothing goes straight up, not even the Nasdaq.

The recent market melt-up has left stocks priced for perfection. In other words, investors are banking on a preliminary trade agreement between the United States and China in the next two weeks. And Wall Street is betting that the worst is over for the economy. Any deviation from those assumptions could disrupt the rally.

“When everyone is leaning one way, eventually something can tip the scales the other way,” said Keith Lerner, chief market strategist at SunTrust.

Trade war fears return

The scales tipped on Monday.

First, the Institute for Supply Management said the American manufacturing downturn unexpectedly worsened in November. Manufacturing has now contracted for the fourth month in a row.

“The sector is stuck in a mild recession with little prospect of a near-term revival,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients on Monday.

Then US Commerce Secretary Wilbur Ross reminded Wall Street that the trade war may yet get worse before it gets better. Ross told Fox Business Monday that the Trump administration could increase tariffs on China if no agreement is reached by December 15.
That one-two punch of bad news drove the Dow around 200 points, or 0.8%, lower on Monday. The S&P 500 fell 0.9%, a sharp move considering the index hasn’t suffered even a 0.5% decline since October 8.

“The biggest risk to the market is that the trade stuff starts unraveling,” said Lerner. “Then all bets are off, and you could have a much more severe correction.”

That’s what happened this time last year, when the S&P 500 suffered its worst December since the Great Depression.

December is Wall Street’s best month. It wasn’t last year

It’s too early to say Monday’s market drop is the start of a new slump.

This may be just a blip on the way to new record highs, especially if a preliminary trade deal gets done. And despite last year’s S&P slide, December is typically the S&P 500’s best month of the year, according to CFRA Research.

Still, it’s clear market sentiment has reached unsustainably high levels. The CNN Business Fear & Greed Index recently hit the highest levels of “extreme greed” since the tax cut euphoria of late 2017.

“It seemed like every day we were going up,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Something that goes straight up, usually goes straight down.”

In addition to trade talks and hints of stabilization in the US and global economies, easy money from the Federal Reserve is also playing a major role.

Not only did the Fed cut interest rates three meetings in a row, but the central bank’s balance sheet has swelled in size as it continues to pump in money to ease stress in the overnight lending market. The Fed injected nearly $98 billion on Monday alone.
The $4 trillion force propelling US stocks to record highs

Although the Fed has said its balance sheet expansion is not aimed at boosting the economy or markets, analysts say it has in fact propelled stocks.

Michael Wilson, Morgan Stanley’s chief US equity strategist, told clients in a note on Monday that the market rally is “due primarily to excessive central bank balance sheet expansion.”

However, Wilson warned that the “liquidity tailwind will fade” by April, forcing the market to “focus more on fundamentals.” And he noted that despite the improved market mood, Morgan Stanley economists still see a 25% chance of a US recession in the next 12 months.

The FOMO factor

No matter the cause, the stock market has been on fire. And yet the underlying fundamentals — corporate profits — have been subdued. S&P 500 per-share earnings declined 0.4% during the third quarter, according to Refinitiv.

That combination of rising stock prices and weak earnings sent valuations surging.

The S&P 500’s price-to-earnings ratio stood at 16.9 in early October, according to Refinitiv. The melt-up lifted the S&P 500’s P/E ratio to 18.3 at the end of November, according to Refinitiv. The five-year average is 17.

Lofty market valuations aren’t happening in a vacuum, of course. Extremely low interest rates make stocks look more attractive by comparison. Relative to bonds, investors have decided it makes sense to pay up for stocks.

Nonetheless, SunTrust’s Lerner said that the melt-up is evidence of FOMO, or fear of missing out.

“When you continue to go up everyday and there is no pullback, it forces people into the market,” he said. “Those are not strong hands. Once the market turns, they will be quick to sell.”

Kristina Hooper, chief global market strategist at Invesco, said the market is indeed vulnerable to a retreat at these high valuation levels—but not for long.

“Any pullback would likely be very short-lived given how accommodative Fed policy is,” Hooper said.

It’s a fresh reminder of the power of central banks. Easy money helped fuel a melt-up in stocks. And it could be enough to prevent a meltdown.



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China’s Hard-Liners Win a Round in Trump’s Trade Deal

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BEIJING — President Trump’s initial retreat from his trade-war threats has handed hard-liners in China a victory. A longer, pricklier trade war and stiff Chinese resistance to economic reforms could result.

Mr. Trump on Friday outlined a partial trade deal that deferred new tariffs on $160 billion a year in Chinese-made goods, a move that would have had him taxing virtually everything China sells to the United States. He also agreed for the first time to broadly reduce tariffs he had already imposed on Chinese goods, halving tariffs on more than $100 billion a year worth of products like clothing and lawn mowers — a striking about-face for a protectionist president who last year described himself as a “tariff man.”

The White House called the deal a win. It said China had agreed to buy large quantities of American agricultural goods, giving farmers hit by the trade war some needed relief. It also means the United States economy will not suffer from new tariffs threatened for Sunday on Chinese-made goods that Americans love to buy, like toys and smartphones.

But the deal may be seen by Xi Jinping, China’s top leader, and his hard-line supporters as vindication of the intransigent stance they have taken since the spring, when a previous pact struck by Chinese moderates fell apart. Since then, China has asked that even a partial deal include tariff rollbacks. American officials resisted, debated, then relented.

In essence, a year and a half into the trade war, China seems to have hit on a winning strategy: Stay tough and let the Trump administration negotiate with itself.

“The nationalists, the people urging President Xi Jinping to dig in his heels and not concede much, have carried the day,” said George Magnus, a research associate at Oxford University’s China Center. “I don’t see this as a win for market liberals.”

Friday’s announcement makes it likelier that China will resist any further concessions next year, and perhaps beyond. It seems to affirm the belief, held by many Chinese officials, that Mr. Trump will back off from his trade-war threats if markets tumble, or if his supporters in agricultural states suffer too much.

Even before Friday, Mr. Trump had delayed or canceled tariffs four times this year. Such policy shifts could ultimately encourage Beijing to draw out negotiations even further, to reach the best possible deal.

The effects could ripple beyond trade. Friday’s deal essentially forestalls discussion of curtailing the Chinese government’s support for its homegrown industries, which China hawks within the Trump administration see as posing a direct threat to American businesses.

One state-owned enterprise has erected 110 vast hangars, computerized design studios and other buildings on the outskirts of Shanghai to build commercial aircraft in competition with Boeing. Dozens of Chinese cities are erecting subsidized factories to churn out semiconductors in competition with American giants, as well as with companies in Taiwan and South Korea.

Trump administration trade hawks and American business groups say state-subsidized Chinese companies could wipe out international competitors. They point to the solar panel industry, which boomed in China thanks in part to almost unlimited financing from state-owned banks. Factory closings in the United States and Europe have left China in almost total command of that industry.

But Mr. Xi and his backers argue that China needs those subsidized industries. Mr. Trump’s moves this year to deprive Chinese companies of American-made chips, software and other essential goods of the modern age, after allegations that the companies were linked to human rights violations or intelligence-gathering activities, underscored for many in Beijing that China depends too much on the United States.

The Trump administration had a two-prong strategy for dealing with China’s industrial policy. Its first choice was for China to agree to tight limits on subsidies. The second was to leave steep tariffs in place across a wide range of goods as a kind of informal anti-subsidy measure, offsetting China’s support for its homegrown companies and giving American and other companies room to invest and compete in the United States.

The administration has now stepped back from the first position. And by cutting tariffs at all, the administration has shown a new willingness to retreat — although the products covered by the halving of tariffs on Friday were fairly low tech.

The issue of China’s state subsidies was more prominent in earlier talks. In April, Mr. Xi’s market-oriented team of trade negotiators accepted preliminary compromises in Washington that would have left a lot of tariffs in place and rolled back some Chinese laws that the White House said favored Chinese companies unfairly.

But Mr. Xi sided with hard-liners who demanded that the deal be torn up and renegotiated, because the deal did not include a broad reversal of tariffs that had already been imposed and because it demanded detailed changes in laws that were seen as violations of national sovereignty.

In October, trade negotiators reached another tentative deal without tariff rollbacks, only for hard-liners in Beijing to again demand revisions again and a removal of tariffs.

People close to China’s economic policymaking process say that as the trade talks progressed this past week, the mood among Chinese officials gradually shifted from deeply worried to cautious and finally, by late in the week, jubilant and even incredulous that the hard-liners’ goals had been achieved.

Even the major concession to the United States — China’s agreement to buy more agricultural goods — could enhance the power of the Chinese state. Those purchases would most likely be carried out by state-controlled companies, preserving their indispensable role in Chinese commodities trade.

China hard-liners are not the only ones who benefit from Friday’s deal, of course.

American companies and farmers are likely to find it easier in the coming months to sell everything from semiconductors to soybeans to China, making corporate sales goals and executive bonus targets easier to meet.

Mr. Trump himself may face only limited criticism. The companies likely to be upset about backing away from the issue of Chinese subsidies are based largely in states that vote Democratic, like California’s technology companies. Those businesses may also benefit in the short term from lower tariffs.

Still, the deal on Friday pushes the thorny issue of China’s state support for its industries down the road, most likely complicating relations between the world’s two largest economies for years to come.

“In the long term, the U.S. is going to have to address the practical impact, and not just the political impact, of the industrial imbalance caused by China’s policies,” said Malcolm McNeil, an international trade lawyer at the firm Arent Fox who advises Chinese and American companies.



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What’s Next For Marketing Design

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Few aspects of marketing escape the increasing velocity of business, and design is no exception. Marketing teams recognize that the shelf life of graphic innovation can be short. 

I recently asked Andy Zimmerman, president of frog, a design and innovation firm, to share his insights on where marketing design is heading.

Paul Talbot: When you reflect on the design landscape of 2019, what’s the most significant thing you see?

Andy Zimmerman:  We see a maturing of design in many companies, large and small.

One example of this is the emergence of ‘designOps’ as a way to manage the design process within organizations.  It is the next step in design becoming a business process within companies so that other functions can work with designers more effectively.

It’s also an acknowledgment of the fact that the types of challenges being taken on by designers are larger scale than something a single person can manage.

Talbot: We live in an age where business prizes speed. How does this impact the way consumers engage with design? As consumers, are we less patient in terms of absorbing the messages of design? 

Zimmerman:   In designing new products and services, we are increasingly asked to minimize the classic design research efforts.  Aggressive startups sometimes even blur the distinction between prototyping, getting customer feedback and iterating on the design, versus simply putting prototypes into the hands of real customers and markets, and refining the design on the fly.

Talbot:  As we spend more time on screens and less time with paper, what has the impact been on design?

Zimmerman:  The impact is twofold, especially for designers.

While digital screens are amazing and make our lives much easier, they also diminish from our tactile sensitivities, weaken our ability to focus and (ironically) limit our minds to greater possibilities.

When designing on the computer, a designer must follow a specific sequence of actions to get a desired result as allowed within parameters of the software.  This doesn’t allow for spontaneous exploration or the ‘happy accidents.’

Talbot: For thousands of years, the process of selling has been a blend of the factual and the emotional. In recent years, has our use of technology tilted the scales to make us less emotional, or are the ingredients of human nature when it comes to buying and selling much the same as always?

Zimmerman:  People are emotional creatures.  Not only do we sense this from our own experience, but research shows that we often justify our emotional decisions with a factual, rational explanation.

Technology has increased the information available to us to make purchase decisions.  However, the way we evaluate that information and experience the purchase journey are, if anything, more emotionally driven than before.  We have worked extensively in retail experience design, where marketing communications are being replaced by experience design, moving the purchase decision from something you read and see toward something you feel.

Talbot:  Has technology ‘dumbed down’ design through the proliferation of symbols and icons, or does this open new creative doors?

Zimmerman:   There are tremendous creative opportunities available to designers today that didn’t exist a generation ago.  Design has shifted from solely creating aesthetic value to broader problem solving.

Icons and symbols are a visual language that have become a very effective form of shorthand and standardization.

For instance, the standardized aesthetics of software design ‒ delighting a consumer’s eye through visual differentiation ‒ is less valuable than consumers understanding how to engage with brands through digital.

Imagine a Black Friday where every retailer had radically different e-commerce shopping cart experiences and consumers were required to learn how to use each of them.

Talbot:  Any other observations you would care to share on the state of design?

Zimmerman:   Design is experiencing huge growth and evolution fueled by the needs of organizations, enterprises and governments to engage with their constituencies digitally.

The field would need to expand by around 20 times to meet the demand today. Designers’ creativity is a critical ingredient in the creation of these digital experiences, which require high levels of collaboration between designers and other disciplines, such as software engineers.

Because of this, we will likely see less lone-wolf superstar designers and the rise of winning teams that can effectively scale designers’ creativity and impact in this new context.



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Read This Before You Buy First Savings Financial Group, Inc. (NASDAQ:FSFG) Because Of Its P/E Ratio – Simply Wall St News

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Of late the First Savings Financial Group (NASDAQ:FSFG) share price has softened like an ice cream in the sun, melting a full . But there’s still good reason for shareholders to be content; the stock has gained 12% in the last 90 days. Looking back over the last year, the stock has been a solid performer, with a gain of 30%.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for First Savings Financial Group

How Does First Savings Financial Group’s P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 9.65 that sentiment around First Savings Financial Group isn’t particularly high. We can see in the image below that the average P/E (12.9) for companies in the banks industry is higher than First Savings Financial Group’s P/E.

NasdaqCM:FSFG Price Estimation Relative to Market, December 14th 2019

Its relatively low P/E ratio indicates that First Savings Financial Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with First Savings Financial Group, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It’s nice to see that First Savings Financial Group grew EPS by a stonking 45% in the last year. And it has bolstered its earnings per share by 23% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.

Remember: P/E Ratios Don’t Consider The Balance Sheet

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does First Savings Financial Group’s Debt Impact Its P/E Ratio?

First Savings Financial Group has net debt worth a very significant 115% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.

The Verdict On First Savings Financial Group’s P/E Ratio

First Savings Financial Group trades on a P/E ratio of 9.6, which is below the US market average of 18.6. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Given First Savings Financial Group’s P/E ratio has declined from 9.6 to 9.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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