Stocks & Markets

Stocks: Handicapping the Rest of '09


On Nov. 4, stocks rallied on hopes the Federal Reserve would make clear that interest rates would remain low for a long time. But, when a Fed statement was issued saying just that, major indexes gave up their gains and ended mixed. It has become a familiar pattern in the stock market recently: What appears to be good news fails to push equities higher. Consider the third-quarter earnings season. Based on the 397 stocks in the Standard & Poor's 500-stock index that have reported results so far, quarterly earnings for the index are expected to fall 15.7% from a year ago, according to Thomson Reuters (TRI). That's far better than the 24.7% drop predicted by analysts on Oct. 1, when the quarter ended. Thomson Reuters Global Head of Research Ashwani Kaul calls the quarter's earnings "fantastic." But, since Oct. 1, the S&P 500 is down 1%. Corporate Revenue PictureOne explanation is that, after seven months of large gains for stock prices, investors are difficult to impress. "Given that stocks haven't budged," says independent market strategist Doug Peta, "apparently those better-than-consensus expectations were already discounted into stock prices." Some investors say that while they've been impressed with earnings, they have been disappointed by weak sales figures. Brian Bythrow, who focuses on smaller firms as portfolio manager of the Wasatch Microcap Value Fund (WAMVX), says profits often seem like the results of one-time cost-cutting rather than a strong economy. "You've got to start showing revenue growth here," Bythrow says. Companies have already "made the cost cuts and they're pretty lean." On the other hand, there are some good signs for revenues. At least, says John Merrill of Tanglewood Wealth Management, "they're not contracting anymore." In fact, sales numbers, though still down from last year, grew from the second quarter to the third quarter. Also, Kaul says, many executives have said they see key markets stabilizing and demand picking up. "The revenue story has been pretty good—not ideal, but much better than expected," Kaul says. Seasonal FactorsInvestors also might be ignoring earnings altogether, distracted by other factors. "We don't seem to be paying that much attention to [earnings] right now, do we?" says Quincy Krosby, Prudential Financial (PRU) market strategist. "There are other issues we're now paying more attention to," she adds, citing economic numbers, particularly October jobs data due Nov. 6. Seasonal factors might be driving the market as well. October is often a mediocre month for stocks, says Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac. Most famously, the market crashed in the Octobers of 1929, 1987, and, of course, 2008. Last year, the S&P 500 plunged 16.9% in October. Given that history, perhaps the market's minor downtick last month was a good sign, Hirsch says. "We've seen the market fight off some trouble here in September and October and hold on," he says. If Hirsch is right about the market's natural seasonality, conditions could improve: November, December, and January are the three best consecutive months for stocks, he says. Prudential's Krosby believes the market may get support toward the end of the year. In December, stock managers often try to "lock in" their winning positions. "Anybody who is lagging in performance is going to try to make it up," she says. "If history is any guide, that could move the market higher." Outlook for the Economy and ProfitsWhat could also drive stocks higher—or lower—is a big change in the outlook for the economy and corporate profits. Expectations are already high. The fourth quarter is expected to mark the first year-over-year rise in profits in more than two years. According to Thomson Reuters, next earnings season S&P 500 profits are expected to jump 218.5%—lapping 2008's disastrous fourth quarter, particularly for financial stocks—while first-quarter earnings are expected to rise 38%. Despite the stock market's blasé reaction to Nov. 4's Fed announcement, Federal Reserve interest rate policy could also be a decisive factor in future months. As long as the Fed holds rates low, Peta says, "we can be optimistic that [major indexes] maintain the gains they've had so far." But eventually, rates will go higher. He says: "2010 will be a different story." The stock market has seemed to ignore good news in the past month, but it has also shrugged off some bad news and persistent pessimism. After the turmoil of the past two years, the relative stability of the stock market in the past month may be a welcome sign to many investors.
Steverman is a reporter for Bloomberg News in New York.

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