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February 10th, 2020

Chadd Mason, CEO The Cabana Group

Q4 Earnings Continue to Beat Expectations and Provide Investors with Hope

U.S. corporate earnings continue to roll in beating expectations on both the revenue and sales side. The S&P 500 earnings growth rate remains at 8% annually, while year over year fourth quarter earnings saw an increase of 0.7% (according to FactSet). This is the first positive YOY quarterly growth in the S&P 500 since 2018. The growth rate has dropped in recent quarters but was still positive overall. Earnings drive current and future price. As such, it is to be expected that Q4 2019 reports would be strong given the run up in stock prices over the past six months.

With impeachment no longer a distraction and the coronavirus becoming old news, investors can now turn their attention to the prospect of continued growth. The S&P 500 aggregate forward P/E ratio is 20 and significantly above long-term averages. This implies that earnings growth will have to accelerate to justify current price as well as price gains going forward. Whether this can happen is of course anyone’s guess, but the collective wisdom of the world’s equity investors seems to think it is possible. I wrote a commentary several weeks ago suggesting that investors seemed to find conditions for growth just right. This “Goldilocks” scenario occurs when interest rates are low, inflation is contained, and companies can efficiently borrow to invest in their own products and services, thereby growing their earnings.

The one noticeable current concern for me is the flat yield curve (recently inverted). When short term rates are the same or lower than long term rates, banks cannot make money loaning money and access to capital dries up. If the growth story were as strong as the stock market seems to think it is, we would expect the bond market to have higher long-term rates. After all, who would loan their money out for ten years in return for a 1.55% return when they could invest it in a company like Apple or Amazon or even the S&P500 as a whole and experience a much better return. This bit of common-sense analysis suggests that the bond market is not as enthused about future growth as the stock markets would otherwise indicate.

We will continue to keep a close eye on this important part of the picture. At Cabana, we remain Moderately Bullish.

Key Terms:  The S&P 500 PE Ratio is the price to earnings ratio of the constituents of the S&P 500.

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This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.

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The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be   representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. RIAs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.

The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. RIAs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period.  Visit www.fa-mag.com for more information regarding the ranking.

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