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.
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Although the markets were closed yesterday and today, here’s a “week-at-a-glance” view of what’s coming up over the next four market days assuming information gets released as scheduled.
Beginning yesterday, the Commerce Department reports on personal income and spending for September. Tuesday is a “mix” of international and domestic events as The S&P/Case-Shiller home price index for August comes out along with the Conference Board’s release of its index of consumer confidence for October. The Bank of Japan also holds policy meetings, as that country has some notable economic struggles. Wednesday brings the third quarter employment cost index along with a vote by Portugal’s parliament on their proposed budget for 2013. Thursday is as very busy domestic reporting day, as auto makers and many retail chains post sales for October along with the issuance of The Institute of Supply Management’s manufacturing index for the same month. There is also a wide variety of other metrics being released, including: private payroll employment, new jobless claims, construction spending and business productivity. The market week ends Friday with the U.S. releasing the October employment report. As an “add on” Saturday, the G-20 finance ministers meet in Mexico.
What does this mean for investors?
For yet another week, we have a market “tug of war” going on between the negative impact of lackluster corporate earnings and the possibility of increasingly upbeat attitudes from the American consumer. With Hurricane Sandy approaching the Mid-Atlantic states, expect the end of the week to be much more “market moving,” as several key earnings releases have been pushed towards late week and will now coincide with much of the consumer-driven data coming out. Further, as markets will be closed today and Tuesday, Wednesday has the potential to be a very active day.
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According to recent data, global trade has clearly slowed.
The volume of goods sold across borders fell in August by 0.4% after a similar drop in July, clearly showing that the combination of Europe and China is being felt by the world economy. In the United States, exports declined in the third quarter for the first time in more than three years. Imports into the United States also contracted, though it was less drastic than the pronounced export drop.
What does this mean for investors?
As opposed to better earnings generated by cuts in costs over the past three years, American companies will clearly be impacted by the “top line” revenue number now. You can only avoid not selling as much product internationally for so long before it becomes impactful across the board. Clearly, if you look at the current earnings picture and guidance for the next few quarters, we’re now seeing it across a wide variety of industries. Interestingly, U.S. companies continue to hold record levels of cash. Due to lack of confidence caused by the “fiscal cliff” and the global economic outlook highlighted here, American business leaders are simply not putting that cash to work for hiring, capital investment or acquisitions.
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Hurricane Sandy will have a wide variety of market impacts this week.
We’ve already mentioned the delay in earnings releases this week from several companies. The hurricane has also caused the grounding of over 6,800 commercial flights, certainly impactful for that industry unless some of this can be “made up” later with rescheduled flights. In addition, refiners and oil terminals will be temporarily impacted while pipeline companies have been preparing contingency plans. Insurers are also preparing to send their rapid-response teams into the impacted area, although the cost to insurers is likely to be less than it would have been in the past. Insurers over the past few years have been raising home insurance rates in hurricane-prone areas in addition to tightening underwriting standards and slowing sales of policies there. Finally, many government offices will be closed. As one example, the Fed will delay its regularly scheduled reports on selected interest rates and commercial paper issuance.
What does this mean for investors?
In addition to all of the corporate earnings and political impacts on the markets, we’ll always have the proverbial “random element” with us. The most significant such occurrence over the past couple of years was the Japanese earthquake/tsunami, an event that clearly disrupted global supply chains for months. Obviously, Sandy will be a more temporary event and not in the same category, but will be “market impactful” nonetheless, not to mention its influence in several key states in a very close presidential election.
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Be on the lookout for additional “special dividend payouts” here at year-end as a result of fiscal cliff uncertainty.
Among other concerns surrounding the fiscal cliff, one of the more pressing issues for investors is whether the pending expiration of the Bush-era tax cuts will result in higher dividend taxes. Unless Congress can reach an agreement by the end of the year, dividend taxes will rise to 43.4% from 15%. As a result, a number of companies are seeking to pay out special dividends before December 31st. Already in the past two weeks, four S&P companies have announced such payouts. A similar occurrence happened in 2010, the last time the tax cuts were scheduled to expire. That year, 14 large capitalization companies paid out special dividends in the last three months.
What does this mean for investors?
According to a Goldman Sachs Group study, companies in the S&P 500 index on average pay a dividend yield of 2.1% before tax. With the current tax rate of 15%, the after tax yield falls to about 1.8%, roughly in line with the 10-year Treasury bond. If Congress does not strike a deal, the after-tax yield would fall to 1.2%, making companies that pay large dividends less attractive. (Note: Also investors should know, when a company pays a dividend, the stock price generally declines by the amount of the dividend paid) Just another example (among many) of how the political climate can influence investor behavior in markets.
As the week unfolds and you have questions or concerns, please call me at (205) 989-3498 or send me your comment below.
