It was a week that should have resonated differently as it’s reasonable to conclude that it was important for the average investors’ psychology to see GDP data beating estimates. The expectation was a 1.8% increase, so when U.S. GDP grew 2% in the third-quarter, the clouds should have gone away and the sun should have come out. That pesky little rumor of burgeoning growth is becoming evident and there is some actual momentum happening. Consumer spending was the principal factor of the increase, furthered by purchases of durable goods. Not too shabby it would appear, right? Ahem, for the week the Dow fell 1.8 percent, the S&P 500 lost 1.5 percent and the NASDAQ dropped 0.6 percent.
The familiar culprit of lack of business investment provided a headwind to stronger growth. Lighter revenues are a concern this earnings season with just about 37 percent of S&P 500 companies reporting revenues that beat forecasts, compared with the 62 percent that typically exceed expectations, according to Thomson Reuters data. Sales missed forecasts at 59 percent of companies, the data also showed. Third-quarter earnings at about 71 percent of the index’s companies beat analysts’ estimates, according to data compiled by Bloomberg. The data and the overall GDP sentiment have presented a sort of alternative reality where the confused and perplexed reign supreme. Hurricane Sandy is only going to add a new twist to the narrative, with the potential of market closures into Wednesday, and insurers preparing for the worst in storm damage to property of as much as $4.9 billion, according to Kenetic Analysis Corp. Home and business owners are bracing for potential economic losses ahead during what may be a challenging storm recovery. This was not the October Surprise they were expecting, not even close.
I remain optimistic. This earnings season has been a very challenging one and investors should look beyond some disappointments and focus on an improving economy. A growing economy will underpin growth in stocks and all other instruments. External bearish factors include concern about the European debt crisis after Spanish unemployment rose to a record 25% and after Germany expressed more doubts about whether Greece will be able to meet requirements for its European bailout. Our own ‘Fiscal Cliff’ is rapidly approaching, not to mention the elections next week. It’s understandable why confidence is missing; present circumstances present a mixed bag of joy and distress concerning weaker global and domestic economic growth. I remain optimistic, but cautious and defensive.
Dempster R. “Bobby” Cherry