Serious questions continue to hover over virtually all major financial markets. In Europe, the dance with disaster appears to be picking up pace. It’s hard for investors to get a clear sense of what is happening in China; the country’s leaders insist that economic growth, if not robust, at least isn’t sinking, but indicators such as the country’s production of electricity appear to tell a different tale. And in the United States? Well, the fiscal cliff looms very large indeed, now that the election cliffhanger is at an end.
With all that on the docket, there may not be enough good news to propel stock prices higher between now and the end of the year, and perhaps not even enough to sustain them at their current prices.
True, odds are that legislators in Congress will find a way to avert a crash landing at the foot of the fiscal cliff; that there are enough pragmatists able to recognize the economic catastrophe that would follow and the consequences for U.S. standing in the world. But even if that is the case, where is there an impetus for growth?
That’s the conundrum for stock market investors, still awaiting the final few third-quarter earnings reports and bracing for a fourth quarter in which macroeconomic headwinds are still likely to deliver a setback.
As expected, this earnings season is shaping up to be the weakest since the recession ended. While nearly two-thirds of the companies in the S&P 500 have reported third-quarter results that exceeded analysts’ forecasts, those forecasts had been cut back substantially in the weeks and months leading up to the announcements. In many cases, beating expectations wasn’t much of an accomplishment. Sales and revenue results, on the other hand, have been an almost unmitigated disappointment across the board.
There is still the conviction that the third quarter will mark the trough in earnings, but without some stimulus to revenues – or an uncanny ability on the part of corporations to cut costs still further in order to propel profits higher – it’s hard to see where that growth will come from. And as Thomson Reuters has noted, for every S&P 500 company that has published a bullish forecast for the fourth quarter, nearly four have announced they don’t expect their results to measure up to forecasts. That’s not encouraging.
The wild cards are negative ones, too. That doesn’t just mean the fiscal cliff, but Hurricane Sandy, which will eat into fourth quarter GDP by an as yet undetermined amount. We’ll see retail sales reports for the month of October released later this week, but those are likely to reflect the impact of spending in preparation for the storm, and not the impact of the storm itself. The toll Sandy has taken on the economy will begin to show up toward the end of November, when the first wave of holiday shoppers descend on stores nationwide.
PNC Asset Management cut its allocation to stocks at the beginning of the fourth quarter, and chief investment strategist Bill Stone reiterated that wariness in his report to clients last week. He acknowledged that the S&P 500 now trades at about 12.6 times estimated earnings over the coming 12 months, a significant discount to the historical average of 14.3 times. “The risk/reward equation has shifted,” Stone concluded, arguing that the earnings estimates on which those valuation levels depend could continue to fall into the fourth quarter.
Even for those who are optimists at heart, it’s difficult to find much evidence to support that instinctive bullishness. Perhaps that’s the reason why investors who invested in equity markets in the five trading days that ended November 7, chose, according to data from Lipper, to put their money into exchange-traded funds rather than mutual funds.
Owning ETFs, with the second-to-second liquidity they offer, increases liquidity tremendously. That makes these funds a logical choice for someone who wants to dip their toe into the stock market, while being able to whip that toe back very rapidly should the temperature be uncomfortable or a piranha swim into view. During this most recent period for which Lipper reported results last week, Investors allocated nearly $4 billion to equity ETFs, but yanked some $640 million out of mutual funds that invest in U.S. stocks.
This year may go down as one in which we break the pattern for market movement following a presidential election. Historically, the stock market typically gains ground. On average, since John F. Kennedy won the White House in 1960, the Dow Jones Industrial Average has rallied 1.2 percent between Election Day and New Year’s Eve, Capital Economics calculated. We can hope that history will repeat itself once more, but it’s hard to pinpoint a reason why it might.