|Back to main|
Forget Earnings Season -- These Economic Trends Will Move The Markets Instead
4/10/2013 11:00:00 AM
As investors gear up for anotherearnings season , all signs point to decent quarterly results.Analysts steadily lowered their first-quarterprofit forecasts during the past few months, and in the continuation of a multiyear trend, companies are likely to meet or exceed that lowered bar.
In fact, the first quarter of 2012 was also quite solid -- relative to expectations. Nearly 65% of the companies in the S&P 500 met or exceeded consensus profit forecasts. Yet that was of little help to the broader market: From April 2, 2012, until June 1, 2012, the S&P 500 dropped from 1,419 to 1,278 -- a nearly 10% fall.
The S&P's drop could be blamed on the tepid tone of economic data reported by various government agencies, as the U.S.economy appeared to worsen throughout the spring of 2012. From the Purchasing Managers'Index (PMI) to small-business confidence measures and gauges of consumer sentiment, the numbers worsened over the course of the spring. (Notably, the subsequent rebound in themarket was also tied to an improvement in economic trends.)
Now, consider the market's response this month to March's subpar employment report, which showed that just 88,000 new jobs were created overall. The market took a solid hit when those numbers surfaced, but it started the next week on a more upbeat tone once again. (Investors got an early read on the surprisingly negative jobs outlook when the Conference Board Consumer Index reported a nearly 12% drop in February to 59.7 in March.)
And to get all of the bad news out of the way, the National Federation of Small Business (NFIB) reported that its small-business optimism index fell 1.3 percentage points in March to 89.5. The index saw its largest declines in labormarket indicators ,inventory investment plans andsales expectations. In its survey, the NFIB found that just 4% of small-business owners think this is a good time to expand their operations, which is among the lowest ever recorded in 40 years of surveys.
To be sure, the market is largely shrugging off these reports: The S&P 500 remains within 1% of its recent peak, and appears on the cusp of making a new52-week high on any given day. Perhaps investors are assuming the incipient phase of economic weaknesswill be short-lived, and the economy will perk up by summer, as was the case in 2012. Or perhaps investors aren't even paying attention to these economic reports. Ignorance is bliss.
But if you want to preserve anygains you've built up in this multiyear rally, you need to keep watching the economic calendar. Here are three key dates:
1. Tuesday, April 16: Industrial production
For example, the mid-March reading covered economic activity through February (which showed continued improvements that have been underway in this gauge for the past six months). What will the March data look like? If wenote a pullback from the 99.5 February reading, then it's a sign that weaknesses in employment, consumer confidence and small-business optimism are starting to spread throughout the broader economy.
2. Monday, April 22: The Chicago Fed National Activity
3. Tuesday, April 30: The biggest day of the month
Risks to Consider: Remember, economic readings during a one- or two-month span don't represent a trend. Instead, investors will want to gauge trends during a three- to four-month time frame to confirm a major directional change in economic winds.
Action to Take --> My colleague Dave Goodboy recently weighed in with his own concerns about the currentbull market , and I share many of his views. Still, it's wise to let the economy tell us where we are going. If the economy can manage to generate robust data sets in coming weeks and months, then this market rally can extend even further, as there is an ample amount of financial firepower that is still in a "buying" mode. Nevertheless, at this point, it's wise to maintain stop-loss limit orders and adjust your portfolio so that it contains more valuestocks , which tend to fare better in choppy markets.