Stock Market: More Stormy Markets and Weather Ahead!
Week Ahead: Markets to Consolidate!
Wall Street: Jobs data, election may overshadow earnings!
by Ian Harvey
October 27, 2012
The stock market will navigate another big wave of third-quarter earnings in the week ahead, plus some major economic reports—and, most importantly, the October jobs report.
But nature may also play a role, with a late season hurricane threatening the East Coast along the Washington-New York corridor.
It’s too early to say what type of damage the storm could bring, but it could temporarily drive up gasoline prices.
Earnings season may be only half over, but the focus on profits should subside in the week ahead as investors turn their attention to the coming election and Friday's jobs report, the last major data release before the Nov. 6 contest.
More bellwether companies are scheduled to report results in what will be another "peak week" of the earnings season. Such a flurry of numbers normally holds Wall Street's attention and can lead to market swings. But volume and volatility may be slight next week, with market participants opting to remain on the sidelines ahead of the jobs data and the election.
The Churning Stock Market
It appears that the stock market is going to be just churning -- it’s going to be driven more by earnings news than election polls for the next couple of weeks.
A post-election bounce is highly likely simply because it has removed one element of uncertainty. But no matter who wins, the 'fiscal cliff'” is still ahead.
Earnings have been mixed, with earnings per share figures coming in better than expected but revenues and guidance have been pretty bad, and the companies that have provided guidance have been less than enthusiastic about the outlook.
• The Dow Jones Industrial Average (DJI) ended the week down 1.8%.
The Dow is down 2.5% for the month.
• The Standard & Poor's 500 Index (SPX) was down 1.5% to 1,411.94 for the week. The benchmark gauge for U.S. equities has retreated 2 percent in October, indicating it will end four straight months of gains.
The SPX is down 2% for the month.
• The Nasdaq Composite Index (COMP) fell 0.6%.
The Nasdaq is down 4.1% for the month.
However, despite the declines, the Dow is up 7.3% for the year, while the S&P 500 has gained 12.3%. The Nasdaq is up 14.7%
DuPont (DD) was the biggest weekly laggard on the Dow, while Intel (INTC) was the best performer.
The CBOE Market Volatility Index (VIX – 17.06) ), widely considered the best gauge of fear in the stock market, lost 0.3 point, or 1.7% on Friday of the past week, and gave up its short-lived perch atop the 18 level, though its 200-day moving average continued to offer support. As the equities markets turned lower for the week, the VIX jumped 4.4%.
**For a more in-depth look at the past week…..CLICK HERE…..**
The Major ETFs in the Past Week
Austerity and Deflation
With the resurgence of the Romney campaign, which is considered to be more "business friendly," why are stocks so weak? The airwaves have been flooded with gloomy forecasts from business leaders who are focused on the fiscal cliff and high debt levels.
The fiscal conservatives favor more austerity, as they conclude that the increasing debt levels have to result in much higher inflation. Many are hoping that this will be like 1980, when Reagan's election spawned a 20-year bull market.
One election year that no one mentions is 1936, when the country was coming out of the only recession that was worse than the recent one. The debate was similar back then: Kansas Governor Alfred M. Landon wanted government regulation to be removed, and states be given more control. At the time, many businessmen challenged the programs of FDR, as they felt overtaxed and overregulated.
As noted in an excellent paper by Marshall Auerback from the Roosevelt Institute, "the Roosevelt administration reduced unemployment from 25% in 1933 to 9.6%% in 1936, up to 13% in 1938 (due largely to a reversal of the fiscal activism which had characterized FDR's first term in office)."
The author also notes that, "By 1936, many economists and financial experts (notably FDR's Treasury Secretary, Henry Morgenthau) feared the country would go bankrupt if the government kept deficit-spending." (A familiar ring to it!)
"And after all, they argued, the government deficits had "pump-primed" the economy. The private sector could now take off on its own and get back to close to the full employment level of 1928 to early 1929."
The chart of the Dow Industrials shows a nice uptrend from the 1934 lows.
There was little in the way of a correction in 1936, as FDR had a landslide victory, but the uptrend was broken in September 1937. By April 1938, the Dow had dropped over 50% from its highs. It was in 1938 that Roosevelt submitted a budget where the deficit had been eliminated...but unfortunately so had the recovery.
Though other economists argue about the conclusions of Auerback, it is interesting to note that in 1936, the path to austerity was widely accepted. Now there seems to be a similar view that inflation is inevitable and the hope is that by cutting the spending quickly, the inflationary spike won't be that bad.
Unlike a few years ago, no one now seems to be concerned about the threat of deflation -- yet most economists agree it is much harder to stop.
This chart of the deflationary cycle is quite interesting which shows various stages which look similar in ways to the recent past. With the recent debate over the policy with China, the Protectionism & Tariffs phase especially stood out. Hopefully, a deflationary period is not ahead of us.
The good news is that these concerns are unlikely to impact investors until 2013.
The Major ETFs in the Week Ahead
Earnings in the Week Ahead
We have a great deal of earnings reports still to come. In fact, we have 716 companies coming out with results this week, including 106 S&P 500 companies. This means that by the end of this week we will have seen 75% of third quarter earnings results. The aggregate metrics will change over the coming days as more and more companies release results.
But it is unlikely that earnings will have toned down from the ‘disappointingly weak’ outcomes so far for this reporting season. When even companies like Apple (AAPL), Google (GOOG), Amazon (AMZN), Caterpillar (CAT) and DuPont (DD) come short of expectations, then you know that the earnings picture can’t be good.
Here is the current status of the 270 S&P 500 companies that have reported third quarter results as of Friday, October 25th. Total earnings for these companies are down 2.8% from the same period last year and only 61% of the companies are beating earnings expectations. Total revenues are down 2.3%, but only 30.7% of the companies are able to beat revenue expectations.
In a typical quarter, roughly two-thirds of the companies would beat earnings expectations, and close to 60% would come ahead of revenue expectations. In the second quarter of 2012 -- which by no means was a strong earnings season -- we had 68.3% of the companies that have already reported Q3 results beat earnings expectations.
On the revenue side, the ‘beat ratio’ was 39.3% in the second quarter. The average earnings and revenue ‘beat ratios’ over the last four quarters for this same cohort of 270 companies is 69% and 58.2%, respectively.
Investors have come to expect an ‘earnings surprise’ since management teams have fine-tuned expectations by under-promising and over-delivering. The third quarter earnings season thus far runs counter to this narrative, as the surprise this time around has predominantly been on the negative side. May be the redeeming feature of this earnings season is that the underperformance this time around restores our confidence in the earnings surprise all over again.
Total earnings for the 241 S&P 500 companies still to report results are expected to be up 1.2% from the same period last year. The composite growth rate for third quarter total earnings -- where we combine results for the 270 companies that have reported results with what is expected for the 241 companies – is for a decline of 1.1% and revenue decline of 2.5%.
Modestly down Tech sector earnings (down 0.3%) add to seven other sectors that have negative year-over-year comparisons. The predominantly negative tone of company guidance has started showing up in estimate revisions, but overall estimates for the fourth quarter and beyond remain elevated at present.
Total earnings are expected to grow 6.1% in the fourth quarter and in excess of 11% of in 2013. These growth expectations have come down from a few months back, but they still have more room to fall.
Economy in the Week Ahead
While earnings may no longer have much “newsy” value, we do have a bunch of market-moving economic reports on deck as well. The most important economic report coming out this week is the October non-farm payroll report coming out on Friday, but we also have the manufacturing ISM report and other key reports.
Conclusion for the Week Ahead
As was expected, the selling carried over to last week. Despite Friday's mixed close, we may see another push to the downside early in the week.
Even if stocks do bounce this week, the odds of further new correction lows are still high. The intermediate-term analysis suggests we should get a good buying opportunity in the next two to five weeks.
As for new recommendations, the current drop in the precious metals is a buying opportunity. More conservative investors could wait until we get new daily buy signals, which we do not have yet.
The other markets that look interesting are the emerging markets; though wait for a better entry in the China ETFs, which are now overbought. The Vanguard Emerging Markets Viper (VWO) is looking good.
Further Articles Relating to the Week Ahead
1. The Economy and Earnings in the Week Ahead – October 29, 2012
2. The Past Week Stock Market Results – October 29, 2012
3. The Major ETFs in the Week Ahead – October 29, 2012
4. Companies Reporting Earnings in the Week Ahead - October 29, 2012