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Earnings Lackluster, but Jobs Report a Blockbuster!

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PantagesThe third quarter earnings season is winding down. With 441 of the S&P 500 companies reporting, Q3 earnings are fell 3.5% YoY. They are however up 3.5% YoY if energy companies are excluded. Still, it will be difficult for the stock market to make major gains unless earnings improve. Valuation re-ratings have accounted for much of the market’s rebound overt the past 30 days.

Bloomberg reports that for 2015 “S&P earnings are expected to fall 0.5%. For 2016, earnings growth is now seen at 7.9%, down from 10.9% in July.” In contrast, Societe Generale expects euro-zone earnings to “grow significantly in 2015.” They forecast the Euro Stoxx 50 earnings up 10% this year and 5.7% in 2016.

October’s headline employment released Friday was a much larger than expected +271,000 and the prior two months’ job gains were revised up by 12,000. The unemployment rate fell to 5.0% with the participation rate unchanged at 62.4%. Wages rose at the strongest clip since 2009, up 2.5% YoY. The report was unambiguously strong.

In testimony to congress earlier in the week, Federal Reserve Chair Janet Yellen said a mid-December decision to increase interest rate is a “live possibility” if economic growth holds up. The jobs growth numbers suggest December is very much on the table. That’s good. It means the economy is doing better.

Bonds sold off hard on the strong employment report. The two year Treasury jumped to yield 0.89%, a five and a half year high. The ten year sold off to 2.33%, up almost 15 basis points for the week.

This week the US stock market gained 1.0% as measured by the S&P 500, which closed at 2,099 on Friday. Europe (Stoxx 50) was up 1.5% in euros but down 1.1% in dollars. Japan’s Nikkei was up 1.0% in yen, but -1.1% in dollars. Prospects for a rate hike in the US have driven the dollar higher. The dollar is overvalued but can stay that way for a while!

Holiday sales – Thanksgiving and Christmas are just around the corner. ISI weighs in with an early forecast based on the fact that holiday sales are correlated with the stock market. “The S&P 500 is now +8.2% above its September average – if that holds, a 20 year regression line suggests that holiday sales will be up +7.6%.That would be a huge number! Fingers crossed.

I’ll be doing a short presentation for Rotary Tuesday morning on Keys to Investment Success.

Wednesday is Veterans Day here in the US and Remembrance Day elsewhere. It was initially designated to commemorate the end of WWI. I can still remember reciting “In Flanders Fields” as a child. It’s a great poem. https://en.wikipedia.org/wiki/In_Flanders_Fields

Thursday is Cathie Straub’s big day. She will receive a Woman of Achievement Award from the YWCA. The award recognizes and honors women who have demonstrated qualities of leadership and excellence in their professional and personal endeavors as well as their contributions to the larger community. Congratulations to Cathie.

And finally on Friday APCM will be presenting to OLE. OLE (Opportunities for Lifelong Education) is an adult learning group that takes classes at UAA. APCM is teaching four classes, one each Friday in November. The broad topic is Understanding Investments.” Bill Lierman is covering the bond market today, while Brandy Niclai will be speaking on the stock market next Friday.

Have a great weekend everyone!

Jeff Pantages, CFA®
Chief Investment Officer

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