The World is Ending and Stocks are Plunging (Again)

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Profit Losses Earnings The major news magazines want you to know that "The Debt Crisis Is Even Worse than You Think" (last week's cover of BusinessWeek , printed in red ink), or that Europe and the United States are now "Turning Japanese" in a "New Politics of Paralysis" (the cover of The Economist ). Their implication, of course, is that this has never happened before. We are in "uncharted waters," so your "wealth is at risk."

On the surface, this scary story is an easy sell. On Tuesday, stocks fell for the seventh day in a row. The Dow fell 266 points, its worst day since Aug. 11, 2010. On the same day, gold soared to $1,660 per ounce, an all-time high, even though oil fell 1.2% to $93.79. Then, on Wednesday, the mood worsened. The Dow fell another 150 points on the opening and gold gained $12 to $1672 (while oil sank to $92).

Wednesday closed slightly up, breaking the string of eight straight negative days, but Thursday was much worse, with the Dow down more than 512 points, while NASDAQ and the S&P fell nearly 5% on average. Even gold took a tumble, falling $15 to $1,650, and oil fell more than $5 to $86. Meanwhile, 90-day T-bills offer just 0.01%, while two-year Treasuries sank to a record-low 0.27%. The yield curve is orderly but deflationary: Five-year Treasury yields fell to 1.09%, 10-years to 2.42% and the 30-year fell to 3.68%.

All of a sudden, it looks like the bull market of nearly 30 months is over and hurricane season has begun.

Let's seek some balance on yesterday's news. Let's look at both sides of the story. True, the government doesn't know how to balance its budget, but U.S. corporations have stockpiled trillions of dollars in excess cash. We have high jobless rates, but the flip side of that fact is that companies are getting more done with fewer people. True, the U.S. economy is growing slowly, but corporate earnings are soaring.

While the big headlines say that the U.S. GDP rose only 1.3% last quarter, the revenues and earnings of the 393 (78.6%) reporting S&P 500 companies are both up by an astonishing 13% over the second quarter last year. That's tenfold faster than GDP growth! And if you exclude the sick financial sector, revenues are up 15.6% and earnings are up 22.2%! So far, the S&P earnings are 6.4% above analysts' estimates!

These stellar earnings show no sign of slowing. Analysts now expect to see even stronger double-digit earnings growth in the third and fourth quarters, in all categories. According to economist Ed Yardeni, large-cap forward earnings have risen in 42 of the past 44 weeks, mid-cap forward earnings have risen in 20 of the past 21 weeks and small-cap forward earnings have risen in 42 of the past 47 weeks.

How can corporations keep growing while the domestic economy is anemic and government is clueless? Most major U.S. businesses are multinational, so they can profit from the double whammy of a rapidly growing global economy and a weak U.S. dollar. Companies can cut costs; governments apparently can't.

Bottom line, the market is not likely to keep falling sharply while earnings keep rising. In the last double-dip recession (1979-82), corporate earnings were falling. That's not happening now, and it's not likely to happen for the next few quarters at least. In addition, the stock market always rises in the third year of the four-year presidential cycle. With the S&P now under water for the year so far, this election cycle history implies a late-year 2011 recovery - like what began last August, after the Fed announced its QE2 plans.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

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Louis Navellier

Louis Navellier

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