Wednesday, November 13, 2013
Stocks were down on Tuesday and early indications show that
Wednesday may be no better. The market's tentativeness is not
because of any fresh signs of economic trouble or problems on the
corporate earnings front or even questions about the global
backdrop. If anything, recent developments on those fronts are by
and large very encouraging.
The only source of fresh uncertainty at present is about the
timing of Fed Taper. The government shutdown and its effects on
economic data, coupled with the scheduled leadership change at
the Fed, had convinced investors that Taper wasn't on the cards
at least through April 2014. But the recent positive turn in
economic data, from the private sector's ISM surveys to the
government's Q3 GDP and October non-farm payroll numbers, appear
to show a lot more resilience in the economy. This has increased
the odds that Taper could get underway as soon as at next month's
Fed meeting. The recent uptrend in treasury bond yields and
movements in foreign exchange markets are clearly pointing in
I see the logic of these emerging expectations and believe that
we will get a December Taper if economic data from here onwards
maintains the momentum that we have seen lately. As stated here
before, a December Taper will cement Bernanke's legacy and will
make life easier for Janet Yellen. Will likely get a reiteration
of current Fed thinking in Janet Yellen's Senate confirmation
hearings that get underway on Thursday.
On the earnings front, we got better than expected top- and
bottom-line results from
) this morning. It is perhaps reasonable to interpret the absence
of any negative commentary from Macy's report as positive for the
holiday shopping season.
) report Thursday morning will give us a more comprehensive look
at the state of the consumer and whether the government shutdown
had any effects on spending.
) will be the key report after the close today.
We now have Q3 results from 453 S&P members. Total earnings
for these companies are up +4.7%, with 65% coming ahead of
consensus earnings expectations. Total revenues are up +3.1% and
42.7% are beating top-line expectations. The composite earnings
and revenue growth rates for Q3, combining the results for the
453 companies that have reported with the 47 still to come, are
+4.4% and +2.9%, respectively.
This has been an overall positive earnings season, with the
earnings and revenue growth rates better than the first half's
pace. But most companies have continued to guide lower, prompting
estimates for the coming quarters to come down. Total earnings in
Q4 are now expected to be up +7.2%, down +11.7% growth
expected in early September. This negative revision is
nothing new, we have been seeing this trend play out quarter
after quarter. But the market has largely been shrugging it,
hoping for better times ahead on the earnings front.
My theory on this is that the ever-supportive Fed has been
instrumental in putting investors in a forgiving mood. But it's
far from clear whether they will remain in that mood in a post-QE
world. We will have to wait and see.
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Director of Research