One thing I try to do when I review data is to make sure that I am not fitting the data to my hypothesis as doing this would play right into the quote above. This week I spent some time looking at data from the S&P 500 stocks. These companies are the 500 largest represented on the United States stock markets and they command a huge slice of the economy. In addition as the economy seems to be skewed towards the larger capitalized businesses this group should be performing well to drive the stock market to its new highs.
I looked at the historical company earnings as company earnings drive stock prices. I then created two charts that show the relationship. As the most recent quarter's numbers are not yet completed I could only take the study to the end of 2012. Each chart shows the trailing twelve months earnings per share for the S&P 500 in blue and the S&P 500 stock index in red. The first chart goes back to the year before the bubble burst (2007) and the second looks at earnings from December 2011.
As you can see in the first chart the blue line (company earnings per share) is falling while the red line continues to rise. When I drill into those numbers a bit more in the second chart you can see that the fall off in earnings per share is relatively steep while the market trajectory continues unabated. The obvious answer to the market's continued trajectory is that investor expectations are that this is a short term lull before earnings once again ramp up. However at just past the half way mark through the earnings season it is looking like earnings may not grow. Worse than that only 44% of companies that have reported have beaten their revenue projections. So while a number have beaten their earnings numbers, these numbers are being squeezed out of a shrinking lemon. As an example IBM missed revenues by $1.3B!
Today however the market is higher by more than one percent to fresh all time highs on the back of some decent looking employment numbers. As I have mentioned repeatedly the economy will not get into its stride until the employment picture improves so on the surface it seems that the market has what it wants (in order for earnings to accelerate, revenues need to grow and this will only come from the consumer). More jobs means more spending and after a decline in retail sales in March, the market is buying that this will mean a resurgence in spending in April. The opposite is likely as most of the job growth came from part-time workers. In fact the average number of hours worked per week fell. If the savings rate resumes its normal level of 3.5% it is likely that April retail sales will decline for a second month.
This is not good news for a market that is buying future growth however once you have taken a sip of the juice it is hard to see straight. Further with the tail wind of continued government stimulus there is no reason to think that the market will drop any time soon (tongue in cheek as you should know by now)! This is precisely why I am not long as this is exactly what it felt like in 2000 and again in 2007. I remember all too clearly the pundits applauding more stimulus and a forecasting the Dow at 20,000 in a few years and it appears to be more of the same but looking at the two simple graphs above the earnings signals are clear.
In addition margin accounts at brokerage companies are once again at levels not seen since 2007 right before the market crashed so as painful as it is to watch I have stepped aside. This is the only prudent thing to do if you have data to validate your hypothesis and you have ensured that you have not manipulated it to fit your theory.
No comments:
Post a Comment