Earnings, Earnings, Earnings, and Elections
By Ken Mahoney
In real estate, we are taught over and over again it's “location, location, location”. Well for particular stocks, stock sectors and stock markets, it should be “earnings, earnings, earnings”.
While there are a number of factors that may affect the stock market including government policy, interest rates and investor confidence, these factors always impact earnings. And this past earning season seems to have done pretty well.
As we know from history, October can be spooky and we’re not talking just about Halloween. Ironically, it’s been during October that we’ve seen particularly scary stock markets with the October 1929 crash, the October 1987 crash and the October 2008 crash. At this moment however, the stock market has some strength and momentum. There are a number of reasons why the stock market may have momentum now including perhaps another round of quantitative easing, and maybe a more business friendly Congress. And perhaps it's earnings.
Many people don’t understand the disconnect between Wall Street and Main Street, especially while Main Street is still suffering. Daily we hear reports about housing foreclosures and high unemployment. What we don’t pay enough attention to is what is happening overseas - PIIGS (Portugal, Italy, Ireland, Greece, and Spain) saddled with too much debt, economic and social unrest and their attempts to deal with that debt. That story played out very strongly this past summer as the U.S. markets were powerfully impacted by those conditions.
In addition, I don't think enough attention is paid to BRIC (Brazil, Russia, India, and China). These countries are growing. U.S. companies penetrating and selling to those markets are doing very well. According to some reports, S&P 500 companies earn more than 40% of their profits overseas. So, when you scratch your head to try to understand how the stock market is doing well despite our lows here in the U.S., maybe if you look at abroad you can understand why this is all happening and that's because companies are getting their earnings, earnings, earnings from overseas.
October provided another example that the stock market and the economy do not always move in tandem. For the month, the Dow posted its best October since 2006, rising 3%, the S&P advanced 4%, and the Nasdaq leapt 6% . Meanwhile, the government’s initial reading on Gross Domestic Product – the broadest measure of the economy – showed that the current recovery is still one of the weakest in generations.
For three months ending in September, GDP grew at an annual rate of only 2%. During the past 30 years, the average growth rate during a U.S. economic expansion has been 3.6%. During the end of 2009, growth was as strong as 5%. In light of these figures, the past two quarters have been understandably disappointing (2Q growth was 1.7%). What do these numbers mean in plain English? On the bright side, they mean the economy isn’t shrinking; or worse, freefalling, as some naysayers have predicted. They also show that we are moving in the right direction – even a 0.3% increase is worth noting. From another perspective though, the lackluster growth we are seeing is too slow to bring down the unemployment rate, and likely too slow to keep the Federal Reserve from intervening with another round of quantitative easing.
Even as voters hit the polls Tuesday, the Fed’s FOMC (Federal Open Market Committee) is set to convene its 8th meeting of the year. As investors digest election results the following day, economists expect the Fed to announce plans stimulate the economy with another $500 billion to $1 trillion injection.
Also anticipated this week is the government’s closely watched jobs report due Friday. Employers are expected to have added 45,000 jobs in October, and the unemployment rate is projected to hold at 9.6%. Since the jobs report comes out after the Fed’s plans for quantitative easing are announced, investors will surely be analyzing it for signs as to whether QEII was warranted.
Between the election, the Fed’s FOMC meeting announcement, and the jobs report, the first week of November will be a busy one.
ECONOMIC CALENDAR:
Monday – Personal Income and Outlays, ISM Manufacturing Index, Construction Spending
Tuesday – Motor Vehicle Sales
Wednesday – ADP Employment Report, Factory Orders, ISM Non-Manufacturing Index, EIA Petroleum Status Report, FOMC Meeting Announcement
Thursday – BOE Announcement, Jobless Claims, Productivity and Costs, ECB Announcement, EIA Natural Gas Report
Friday – Pending Home Sales Index, Employment Situation, Consumer Credit
Data as of 10/29/2010 1-Week Y-T-D 1-Year 5-Year 10-Year
Standard & Poor's 500 0.02 6.11 10.9 -0.25 -1.42
Dow -0.13 6.62 11.6 1.38 0.50
NASDAQ 1.13 10.5 19.5 4.00 -2.35
MSCI EAFE -0.49 2.25 5.46 0.57 0.75
10-year Treasury Note (Yield Only) 2.56 3.84 3.50 4.57 5.71
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.
HEADLINES:
Monster Worldwide (jobs website operator) reported third-quarter results Thursday that easily topped forecasts, and the company raised its fiscal outlook. During the company's conference call, Monster CEO Sal Iannuzzi said that "while economies still aren't as strong as any of us would like to see them around the world, they are picking up." He added that "the momentum clearly in Europe, United States, North America and Asia is significantly more positive than it was a year ago."
For the school year 2010-11, in-state tuition and fees at public four-year colleges and universities rose to $7,605, up 7.9% from a year ago, the College Board reported Thursday. At private four-year institutions, the average cost rose 4.5% to $27,293.
September’s new-home sales climbed 6.6% from a month earlier to a seasonally
adjusted annual rate of 307,000 the Commerce Department said Wednesday. When compared to a year earlier, the rate tumbled 21.5%. September saw the fourth-worst monthly reading since 1963, though these statistics are notoriously prone to later revisions.
Two packages found on cargo flights from Yemen bound for the U.S. contained explosive material, President Barack Obama said Friday, after U.S. and European authorities went on high alert following the discovery of the parcels. President Obama said authorities had uncovered a “credible terrorist threat.” Both packages were addressed to Jewish organizations in Chicago.
