Disappointing corporate earnings sent stocks lower this week. Through the close Friday, the Dow was off 1.8%, the S&P lost 1.5%, and the Nasdaq fell 0.6%. Gold sold off, too, losing 0.7%. Like the others, oil was also down, which will be good news at the gas pump. It fell sharply by 4.6% to $86 per barrel while the other major type of oil, Brent, closed below $110.
Source: Yahoo Finance
The market has continued to focus on fundamentals this week (here, the fundamentals are corporate earnings) which repeatedly disappointed, pressuring the markets lower. This is a change in the focus of the market, where it had previously been more concerned with macro issues around the globe and stimulus from the central banks.
We knew heading into earnings season that the results would be disappointing and that appears to be the case. A little more than half of the companies in the S&P 500 have released their earnings and about 60% have beat earnings estimates. Only about 40% have beat revenue estimates, though (revenues are what the company actually earns through sales. Subtracting costs from revenues gives us the profit, or earnings).
The revenue portion is probably the most disappointing story of the earnings season. Estimates had revenue growing by more than 5%, yet that figure is barely above 1%.
For earnings, they actually had negative estimates, but are roughly flat. The quality of the beats has been poor, since companies continue to cut costs to improve their bottom line.
Adding to the negative earnings picture, more and more companies are warning that next quarter won’t be as strong as projected. Commonly referred to as forward guidance, we are seeing the highest negative-to-positive warnings outlook since early 2007. Companies are citing weak global growth as the main culprit behind the sour outlook.
Even high-flying favorites like Apple have disappointed. The company had a rare miss, with lower-than-expected revenues, earnings, and outlook for the future. The stock traded above $700 as recently as last month, yet it crossed below the $600 level this week.
On to economic data, which leaned towards the positive side this week. Housing data was solid, durable goods showed a nice gain, and preliminary data on manufacturing was encouraging.
The GDP figure for the latest quarter also came in higher than expected. The gain of 2.0% was above the 1.8% estimated and much higher than the 1.3% gain from the previous quarter.
Digging further into this number shows a large portion of the gain came from federal government spending, so the figure might not be as strong as it seems.
It should also be noted that last quarter saw a similar initial number that was revised lower to 1.3%, so it may be worth waiting for revisions before making conclusions on the strength of the economy
The week was also nice in that there was little news out of Europe or the Fed. The Fed did hold a meeting this week, but nothing new was announced, as expected. Actually, a MarketWatch article (LINK) early in the week mentioned that the Fed was open to expanding its stimulus program (remember, they are buying (or printing) $40 billion a month in mortgage bonds and $45 billion in government treasuries every month as stimulus) if conditions warrant.
Unfortunately, these stimulus programs have failed to work and likely do more damage in the long run. The Fed seems hell-bent on forcing it to work, so this could be another factor to consider in the future.
Next Week
Next week will be another busy one. Corporate earnings will continue to come in at a steady pace. There will also be many economic releases. As the week progresses, we will get info on personal income and spending, consumer confidence, manufacturing, and construction.
On Friday we will get the unemployment data. Last month made headlines due to the unusual drop in unemployment to 7.8%. This month, many expect the number to climb as the numbers revert back to the mean.
The topic dominating headlines next week, at least the early part, will likely be “the worst storm in 100 years”. Unfortunately there is no escaping it, since New York City is the center of the media universe and we will all be forced to hear of their woes.
Investment Strategy
It looks to us like this recent sell-off has pushed the market to an oversold position. Though we are negative on fundamentals (and the market has been focusing on the fundamentals), it may be worth dipping a toe in here, even just for the short term. Longer term we have our worries.
We’d like to see more of a sell-off before committing more money, but it may be a good point to nibble. We still like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time, as well.
Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs. Even with its recent sell-off, we wouldn’t add to positions at this point, but would not look to sell, either.
We like other commodities for the long term, especially due to money printing around the globe. A slowdown in global growth may weigh on commodity prices in the short run.
Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds. We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely. A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.
On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
We knew heading into earnings season that the results would be disappointing and that appears to be the case. A little more than half of the companies in the S&P 500 have released their earnings and about 60% have beat earnings estimates. Only about 40% have beat revenue estimates, though (revenues are what the company actually earns through sales. Subtracting costs from revenues gives us the profit, or earnings).
The revenue portion is probably the most disappointing story of the earnings season. Estimates had revenue growing by more than 5%, yet that figure is barely above 1%.
For earnings, they actually had negative estimates, but are roughly flat. The quality of the beats has been poor, since companies continue to cut costs to improve their bottom line.
Adding to the negative earnings picture, more and more companies are warning that next quarter won’t be as strong as projected. Commonly referred to as forward guidance, we are seeing the highest negative-to-positive warnings outlook since early 2007. Companies are citing weak global growth as the main culprit behind the sour outlook.
Even high-flying favorites like Apple have disappointed. The company had a rare miss, with lower-than-expected revenues, earnings, and outlook for the future. The stock traded above $700 as recently as last month, yet it crossed below the $600 level this week.
On to economic data, which leaned towards the positive side this week. Housing data was solid, durable goods showed a nice gain, and preliminary data on manufacturing was encouraging.
The GDP figure for the latest quarter also came in higher than expected. The gain of 2.0% was above the 1.8% estimated and much higher than the 1.3% gain from the previous quarter.
Digging further into this number shows a large portion of the gain came from federal government spending, so the figure might not be as strong as it seems.
It should also be noted that last quarter saw a similar initial number that was revised lower to 1.3%, so it may be worth waiting for revisions before making conclusions on the strength of the economy
The week was also nice in that there was little news out of Europe or the Fed. The Fed did hold a meeting this week, but nothing new was announced, as expected. Actually, a MarketWatch article (LINK) early in the week mentioned that the Fed was open to expanding its stimulus program (remember, they are buying (or printing) $40 billion a month in mortgage bonds and $45 billion in government treasuries every month as stimulus) if conditions warrant.
Unfortunately, these stimulus programs have failed to work and likely do more damage in the long run. The Fed seems hell-bent on forcing it to work, so this could be another factor to consider in the future.
Next Week
Next week will be another busy one. Corporate earnings will continue to come in at a steady pace. There will also be many economic releases. As the week progresses, we will get info on personal income and spending, consumer confidence, manufacturing, and construction.
On Friday we will get the unemployment data. Last month made headlines due to the unusual drop in unemployment to 7.8%. This month, many expect the number to climb as the numbers revert back to the mean.
The topic dominating headlines next week, at least the early part, will likely be “the worst storm in 100 years”. Unfortunately there is no escaping it, since New York City is the center of the media universe and we will all be forced to hear of their woes.
Investment Strategy
It looks to us like this recent sell-off has pushed the market to an oversold position. Though we are negative on fundamentals (and the market has been focusing on the fundamentals), it may be worth dipping a toe in here, even just for the short term. Longer term we have our worries.
We’d like to see more of a sell-off before committing more money, but it may be a good point to nibble. We still like large cap higher-quality and dividend paying stocks. Smaller and little-known stocks with low correlation to the market (and Europe) are also promising. There is always the opportunity to find an undervalued individual stock at any time, as well.
Gold is a longer-term favorite, as it will do well with the global money printing, additional bailouts, and stimulus programs. Even with its recent sell-off, we wouldn’t add to positions at this point, but would not look to sell, either.
We like other commodities for the long term, especially due to money printing around the globe. A slowdown in global growth may weigh on commodity prices in the short run.
Treasury bonds yields have moved off their historic lows (where prices were near historic highs), as the new stimulus program shifted its attention from these bonds towards mortgage bonds. We wouldn’t consider the trend to be changing, for a continuation of the current Operation Twist (that has kept Treasury yields low and prices high and is set to expire at the end of the year) is likely. A short position (bet on a decline in price) provides a nice hedge here but we believe the potential for profit is low at this time.
On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible), though our concern has increased as the pace of distressed municipalities is increasing. Additionally, higher taxes from the health care law will increase the attractiveness of these bonds in the future.
Finally, in international stocks, we are less enthusiastic on developed markets, but not totally sold on emerging, either.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
