The inevitable market pullbacks are out there. As we’ve seen over and over for the past few weeks and months, the whipsawing natures of the markets are keeping investors on the edge of their seats. Today’s up, tomorrow’s down…what’s the current correlation of commodities to the dollar? Europe’s finally behaving, um wait a minute, it’s not…. Asia’s recession is a headache. Ha! What Asian recession? The emerging markets are leading the charge to prosperity! It’s enough to bruise your eyeball sockets and send you into a fit of misperception. Unfortunately, I see nothing that would lead us to believe that the markets won’t continue to repeat this pattern in the short term. The Dow Jones and S&P 500 closed out on all-time highs last week, residential housing is surging accompanied by record low mortgage interest rates and employment numbers are curiously receding to near pre-crisis levels. What does all this really tell us? Has the collective brain trust gone nuts believing that all has returned to the better?
Markets will inevitably go higher and also, inevitably, go lower. Earnings drive American industries and they are the growth engines of the country. However, corporations and the analysts who study them are lowering earnings expectations for Q2 2013. In terms of preannouncements, 63 S&P 500 companies have issued negative EPS guidance for Q2 2013 as noted by FactSet. Of the 400+ S&P 500 companies that have reported earnings to date for Q1 2013, 72% have reported earnings above estimates. This percentage is marginally above the average of 70% detailed over the past four quarters. Conversely, merely 47% of companies have reported sales revenue above estimates. Yup, you read that correctly. Earnings are up but sales are down. No, I haven’t become a Doom and Gloom card carrying member, but it’s hard not to notice that something is incongruous here.
Companies and analysts have lowered earnings expectations so dramatically that it’s become predictable that companies can inevitably beat them. Sales are lower and are continuing to confirm a long-term weakness. To paraphrase one of Sen. Marco Rubio’s favorite modern poets, Rakim, “the American worker keeps digging into their pocket, all their money’s spent. So they dig a little deeper but still coming up with lint.” 47% is below the average of 52% recorded over the past four quarters (Factset). If 47% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting sales revenue above estimates finished below 50%. Short-term thinking and solutions aren’t solving our long term problems.
I remain optimistic. Trying to assess whether equities can continue their mighty upward run versus the reality of the Q1 earnings reports are fraying the few hairs I have left on my head. Things are getting better, but not rapidly. A little less short-term exuberance and a lot more long term solutions are my prescriptions for the U.S. economy. Will the market take notice and the U.S. Government get serious in treating our economies ailments? I don’t know, but I remain cautiously optimistic.
Much success in all that you do.
Dempster R. “Bobby” Cherry
Investment Advisor