Are Weak Corporate Earnings A New Worry For Investors?

Ashley Page PictureWe hope that you had a wonderful Thanksgiving with family and friends as we steadily march towards the end of the market year. It’s certainly hard to believe that 2012 is close to being in the record books. As we always do at the start of the market week, we take a “look ahead” at a few items that we will be tracking carefully. These are just a few opinions that we have, and as with life, nothing is certain about them.

  1. First of all, here’s a “week-at-a-glance” view of what’s coming up over the next five market days.

    Today begins with an international flavor, as European finance ministers reconvene for talks on bailout funds for Greece and the United Nations opens a conference on climate change in Qatar. Tuesday brings the release of data on durable-goods orders for October and the S&P/Case-Shiller home price index for September. Portugal’s parliament also votes on a budget for 2013 while President Obama and Mexican President-elect Pena Nieto meet in Washington. Wednesday is a heavy domestic data day, as the Federal Reserve releases its beige book survey of regional economic conditions and the U.S. publishes numbers on new home sales for October. Thursday continues that trend, as a revised estimate of third-quarter GDP is due from the government along with weekly jobless claims numbers. Friday ends the market week with the production of personal income expenditures for October.

    What does this mean for investors?

    This will be a very interesting week to gauge data on both consumer confidence and overall economic conditions throughout the country. The confidence “tug of war” that is going on between the fiscal cliff causing “business lockup” juxtaposed with generally improving data from the consumer and the housing market is a very interesting dynamic. Which will ultimately have the greater impact (both short and long term) on markets?

  2. Mortgage rates have again dropped to their lowest level on record.

    The rate for a 30-year fixed mortgage fell to 3.31% last week from 3.34% a week earlier and nearly 4% a year ago. Low rates continue to encourage Americans to buy homes or refinance their mortgages. Further, many investors expect the Federal Reserve to continue buying mortgage-backed securities to keep rates low and stoke demand.

    What does this mean for investors?

    It would really be good for markets to get American housing solidly “back in the game” after nearly four years of hardly any pulse whatsoever. Simply put, because most Americans view their homes as their single most important investment, feeling “wealthier” about their real estate makes them more confident about spending elsewhere in the consumer economy. Part of the issue this time, however, is that many Americans that might have participated in the current housing rally had their personal credit negatively impacted from all that happened in 2008. This certainly will limit the positive “flow through” impact from having rates so low, as not as many people at present qualify financially as compared to pre-2008.

  3. Is weak corporate revenue the “new worry” for investors?

    Third quarter corporate sales revenue was surprisingly weak, with 61% of companies lagging behind expectations and revenue shrinking by nearly a percentage point – the first decline since 2009. That is significant at present, because while net profit margins often fluctuate, sales revenue generally tracks nominal gross domestic product in the United States. Third-quarter economic growth of 2% beat forecasts, and that is likely to be revised higher when updated figures are released this week. Meanwhile, estimates for fourth-quarter growth have slipped to 1.8% according to a recent Wall Street Journal survey. Even that may be too high if sales keep slipping.

    What does this mean for investors?

    There are two major reasons to be “market positive”about these sales numbers despite the fact that they “fell off” from their normal trend line of tracking nominal gross domestic product. First, the S&P sectors with the least sales growth, namely materials, energy and utilities, translate into lower input costs for the rest of the economy. Second, a major reason for the current sales decline is directly attributable to international exposure. Primarily, slowing growth in Europe (coupled with a strong dollar) squeezed revenue number across a wide variety of U.S. companies. However, the fiscal cliff continues to create an unhealthy “drag” on company plans to expand and hire, depressing “company to company” sales revenues across the board.

  4. And speaking of the fiscal cliff, progress on that front is slow at the moment.

    Congress is due to return to work this week after the Thanksgiving break, having made little progress on a deal to avert the fiscal cliff. In a sign of the current slow pace, President Barack Obama and congressional leaders aren’t expected to reconvene this week in order to give their staff more time to work through political differences. With five weeks to go, our discussions here at Fi Plan center around an expectation that real deal making will begin in a couple of weeks when the pressure begins to mount. The five weeks remaining until 2013 would normally seem too short a time to resolve such fundamental differences, but many close to the talks believe the elements of a deal are at hand due to the fact that both Democrats and Republicans have spent the past two years analyzing these same issues over and over (beginning with Simpson-Bowles in 2010 followed by high-level negotiations throughout 2011).

    What does this mean for investors?

    Very much like the debt ceiling debate from August of 2011, this is yet another example of how government uncertainty is a major “driver” in markets these days. As has often been said, American business can perform well in both favorable and unfavorable economic environments, but what they cannot do well is perform in uncertain environments. The impact of the fiscal cliff and its final resolution is about as uncertain as it gets.

So do you have any questions? Please give me a call or comment below.

Ashley Page
Senior Vice President
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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