Last week, I wrote about the roller-coaster ride markets were subjected to in the first quarter of 2016. Ah, but all’s well that ends well, with the S&P 500 ending March near its 2015 peak, up just over 1% from where the index started in January.
Market Roundup
Not much upward progress, but plenty of sharp swings both up and down. One of the biggest factors causing stock market turbulence is the sharp deterioration in corporate profits.
Lo and behold, next week kicks off first-quarter earnings reporting season, and yes, once again it’s a case of not-so-great expectations.
According to FactSet research, S&P 500 profits will take another deep dive during the first quarter; forecast to plunge 8.5% year-over-year.
It will be the first time the S&P has had four-straight quarters of declining profitability since the Great Recession in 2008.
So if you’re looking for a reason why stocks have been stalled in a trading range since late 2014, it’s because that is exactly when earnings peaked and have been declining ever since, as you can see in the graph below!
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| S&P profit outlook. |
Is the worst of the profit plunge over at this point, or are we about to tip over the proverbial cliff?
To help answer that question, its helpful to look at the trend in earnings revisions going forward, rather than current quarter earnings results.
The bad news: Wall Street analysts are still cutting more company earnings estimates than they are increasing them. But the good news is the downward momentum of profit estimates has slowed in recent months.
In fact, the three-month earnings revision ratio improved during March for the first time since last July, according to Merrill Lynch data.
However, the three-month revision ratio is still in the danger zone at just 53% – indicating nearly twice as many earnings estimate cuts as increases – that’s well below the long-term average of 85%.
A reading this low suggests tough sledding ahead for stocks!
Still, there is some good news in the data IF you’re investing in the right sectors. Wall Street analysts are getting less negative about the profit prospects for multi-national U.S. stocks. This is probably due to the recent weakness in the dollar, which has the effect of boosting overseas sales.
It’s no wonder why the Dow Jones Industrial Average has been outperforming recently, since it’s chock-full of the biggest multi-national blue chips.
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| Earnings revisions over the past three months. |
Three sectors in particular have seen a big improvement in earnings revisions over the past three months: industrials, materials and health care, as shown in the table.
Two of the three sectors, materials and health care, also happen to be lagging the S&P 500 over the past year.
These sectors may be in store for an upside reversal of fortune based on improving earnings; triggering a rebound in beaten-down health-care and materials stocks as well. Stay tuned.
Good investing,
Mike Burnick
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Venezuelan President Nicolas Maduro declared that he is signing a decree giving state workers a Friday furlough for the next two months in a bid to stave off a nationwide power crisis, the Washington Post reports. Along with other steps, he said he hopes to reduce electricity consumption by at least 20%. Officials have warned that the water level behind the nation’s largest dam has fallen to near its minimum acceptable level. Almost 70% of the South American country’s electricity comes from hydropower. Some experts blame the crisis on the government for not earlier investing in maintenance and in the construction of thermoelectric plants.
Amazon is adding 11 cities to the number of areas that will be eligible for same-day delivery service, bringing the total number to 27. The same-day delivery service will be available in Charlotte, Cincinnati, Fresno, Louisville, Milwaukee, Nashville, Raleigh, Richmond, Sacramento, Stockton and Tucson for customers using the company’s website and the mobile app on qualifying orders over $35, it said. Amazon Prime promises to deliver any orders to members by 9 p.m. local time if they’re made before the cutoff time, typically noon. An Amazon Prime membership is $99 a year.
For the first time in two years, the median price for Manhattan renters has declined, according to data from Douglas Elliman. Median rental prices fell 2.8%Â from $3,395 in March 2015 to $3,300 last month, it said. The average rent fell 3.3%Â from $4,126 in March 2015 to $3,989 last month, the real estate group reported. “Tenants have finally reached their pain threshold,” said Gary Malin, president of Citi Habitats real estate brokers. “Pricing remains near all-time highs, and Manhattan renters have reached the point where they can no longer transact — it’s just become too expensive.”
The FBI said that the hacking tool used to unblock the phone used by one of the San Bernardino killers can only be used on the iPhone 5C running iOS 9. The government is considering whether it should disclose to Apple the flaw that aided the hack: “We just haven’t decided yet,” Federal Bureau of Investigation Director James Comey said. Apple refused to help the FBI develop what it said would amount to a new version of its operating system, saying it would weaken its security and become dangerous if the method became public. Comey said the FBI was confident it could keep any secrets from getting out to the public and any illegal hackers.
The Money and Markets team
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 28 comments }
the fed talked up everything but the vix. to much supply in all the markets
Mike,
Your blurb on Maduro furloughing state workers every Friday for the next two months is interesting. I only wish more of our college students would study the disaster of socialism in Venezuela before swallowing Bernie’s pap hook, line and sinker. Socialism does not work, never did, never will. There is no way that gubmint can effectively run all facets of an economy….or even significant chunks like the utilities, banks, healthcare and other institutions that our socialists long to control. Obamacare is already a disaster.
Yeah, those shrinking water levels sure are socialism’s fault…
Yeah, they are. Political direction of resources starves where it’s needed and showers resources on what’s politically favored, not what makes economic sense. That’s how socialism works, or doesn’t.
It does lead to one group getting rich — those who are politically connected. Just look at Washington DC, now the wealthiest and highest-income area in the country. It’s made endless problems for everyone else by smothering growth and distorting incentives. People make bad decisions — e.g. paying absurd tuition for college — and it subsidizes and drives up the sector’s bloated costs. That’s socialism for you.
Crispycritter, those stinking water levels had no backup thermal systems in place as a result of socialism; as mentioned by Mike.
If you are among the 100,000,000 not working, a single mother, a student buried in debt, or part time employee how can you not be in favor of Socialism. In this New Age economy government assistance is their only hope. I don’t like it, but I get it. Jim
How long has it been since government, business enterprise and those really interested in peoples concerns actually sat down and listened to each other. If we are going to bake a successful economic cake, everyone needs to come to the table. Government control, scares away free market capital. An interfering fed confuses free enterprise and arguing Politian’s don’t inspire confidence. But let’s see what happens next.
It seemed to me that Denmark, Sweden, Finland, Norway all are pretty much socialist governments. They have cradle to grave social care and insurance. Their taxes are actually less overall than here. I will concede that often the government there is slow to help when it is needed. It comes….eventually. Slowly. And usually not the same quality as private care. But affordable. What is notable to me is that the populations of these nations are not all a bunch of lay abouts. They could be, but they tend to have a conscience and actually put in the effort to finding and or training for steady work. Here, well, we are burdened with millions of career welfare people. That is wrong. There needs to be a limit on social benefits after a certain time. As in those nations I mentioned. It is NOT socialism in and of itself that is wrong and doesn’t work. It is the people who abuse it…who don’t work and have no intention of ever working. There is no such thing as unemployable. Well, unless they are a paraplegic. Even then there are programs to be useful. Just saying.
Socialism has its faults. Agreed. But then capitalism is has a few of those, too. Yes?
For all it’s good points Socialism features a fatal flaw. It doesn’t generate enough economic activity to maintain itself. Forget the politics, virtually every Socialist society runs out of money. Here, as in Europe, the system is being crushed under a mountain of debt. Jim
Socialism works just fine as long as your spending somebody else’s money
Apart from just laziness/depression, a problem is that minimal, low end work does not pay enough to live. Then it’s better to be on government support.
Mike
You have to look at both sides of the coin. If an economy does not bring along the poor and disenfranchised violence on the streets is the next obvious step. You have to stop thinking like a total capitalist and a bit more like “I am my brothers keeper” What your suggesting is that the rich rise up above us and we bow down as their eternal slaves. If you do not strike a balance the system falls apart.
Gordon Have you ever taken a look at the United States present debt problem our unfunded liabilities is closing in on the $102 TRILLION dollars this liability represents an obligation for each and every taxpayer of $850,189 dollars and the external debt to GDP ratio now stands at 99.73% both of these numbers have been rising rapidly where the breaking point is…………….. is anyone’s guess but the higher the percentage the higher the likelihood of a default, socialism works as long as your spending somebody else’s money, and the democrats are on a spending spree giving it all away freebies for everyone , but if like you said if the poor and the disenfranchised only obvious step is violence on the streets then why throw literally everyone into this mix of violence and despair the upper 2-3 % of wealth will flee this nation pretty much the same way they have done in china . Wouldn’t the correct thing be to control the debt before it totally uncontrollable before we end up like Greece with no big brother ( Germany ) to bail us out
socialism works: steal from the middle class and give to the poor.
capitalism works: steal from the middle class and give to the rich.
prepared for a Hard Landing . . ..
What about socialism in China? Or partial socialism?
We have more personal freedom than China, at least for the moment; but the difference in the financial world isn’t much different. We haven’t had a free market since we went off the gold standard. And though the govt doesn’t own the means of production, the people that overwhelmingly influence the govt actions do. In broad terms, not that different; a matter of degree. Good afternoon, Comrades!
Rubit
I just finished a good article on China and the more I turn it around in my head the more it makes sense. The tasks masters in China requested on April 1st April Fools day that the populous refrain from make stupid comments on China. They stated that April Fools Day is a western way of thinking. One of their own people a Chinese person tweeted back “Everyday is April Fool’s Day” in China. The government mafia there daily lies to its people and of course international investors. Doing business in China is like watching Preying Mantis’s mate. When the male is done if he does not move fast enough the female consumes him.
Why would the FBI tell Apple how they broke into the phone? The fact that the FBI can get into Apple’s phone makes it a lot less valuable to terrorists. And given Apple’s lack of cooperation with the FBI that would be silly. Let Apple stew in their attitude, and the broken promises to the customers.
The government just does not know when to keep its collective mouths shut. If they did the Press would not have a field day making them look stupid.
Retired in Savannah
If you think government statements are stupid there you should do some reading on the PM of Thailand speeches. He makes all politicians look like 2nd stringers. Luckily the media here has been given their marching orders to say only “constructive” things.
Why all the wining about the action of the stock market? The market is doing what the market does. Without volatility, both down AND up, there would be NO gains! I realized some time ago that the market CAN NOT go up every day. If it did by even one tenth of one percent, if would go up by 26% every year! That is never going to happen!
tommr
Obviously you were not around in 1987. When investing the answer is not always in the rear view mirror. If you study this mirror to long and intensely you may just miss the cliff ahead.
Yes Gordon, tommr was also hibernating in 2008. Not yet wake up, so hungry.
If the FBI said that the San Bernardino iPhone 5C was running on iOS 9; then there is a good chance this bug is already fixed under iOS 9.1, 9.2 or 9.3. Ah, the mysterious ways of the FBI.
Hmm, let’s see Mike. You say stocks peaked (symptom) because earnings fell (cause?). I say earnings fell (symptom) because of the real cause of: socialism, poor governance, the Fed and misplaced Keynesian concepts that is.
ANOTHER BIG PONZI SCHEME….HIGHER EDUCATION.
Ask any politician or banker to give you ONE logical reason as to WHY our currency supply should have to be borrowed into existence as DEBT on which interest has to be paid!
Capitalism is just a more refined and disguised form of socialism.
Remember the biblical story of the Israelites experience as slaves in Egypt There could well be another JUBILEE this year that frees the wise from the tyranny of human government and the corrupt fractional reserve banking system in the form of precious metals exploding in value restoring purchasing power as fiat currencies collapse like a deck of cards or row of dominoes . Of course just as Joseph filled the storehouses with food in the years of plenty, we have to do our part by preparing for the economic famine ahead by getting a good portion of our wealth into gold and silver in advance of the coming bankruptcy of corrupt governments.