With the stock market not cheap, decent earnings are more important than ever. So far the data isn’t encouraging. While only 10% of the S&P 500 companies have reported for Q3, many show a decline in revenues/sales and earnings. Alcoa, J&J and Walmart all reported flat or single digit declines in revenues. In general the manufacturing sector looks weak (GE was an exception).
Many banks have reported and the picture there is mixed at best. Wells Fargo said its third-quarter profit and revenues rose slightly. Goldman Sachs and JP Morgan disappointed while Bank of America and Citi beat estimates. Yet, for the week the KFW Bank stock index gained 0.6%.
As a result of the financial crisis the banks have been transformed to look more like regulated utilities. They were required to build capital buffers and improve liquidly. The result was stronger balance sheets, but income statements have been hit due to more regulations, low interest rates (the WSJ notes “assets are being put on balance sheets at lower yields than things rolling off”) and sluggish global growth.
I listened to a conference call with S&P Capital IQ on Tuesday. They noted that Alcoa (first to report) earnings were weak, but that the company probably isn’t a good gauge of Corporate America any more. In fact Tech, Financial and Health Care are the three biggest sectors in the S&P now.
The stronger dollar is hurting top line sales growth (it makes exports more expensive to foreigners). Just under 50% of revenues from S&P 500 companies come from overseas.
Capital IQ says that the consensus is expecting Q3 earnings to be down -5.3% YoY (ex-energy +2.7%). But if history is a guide, earnings usually “beat” expectations and may come in closer to flat YoY. (So far though, the 58 companies reporting this week show earnings down over 7% YoY!)
All of this didn’t seem to bother the stock market. The S&P 500 closed at 2033 on Friday, up 0.9% for the week. It is up 6.0% so far this month. The European markets and Japan’s Nikkei were flattish, while the Chinese Shanghai index rallied +6.4% over the week.
Bond yields oscillated but closed down a nickel on the week with the 10 year Treasury at 2.03% Friday afternoon. Thirty year mortgage rates, by the way, have remained stuck at around 4% for most of the year.
The FT reported that the probability that the Fed remains on hold until March 2016 is now 50/50 according to the fed funds futures market. At the beginning of the year that probability was close to zero. This has hurt the dollar, but helped the bond market.
Good News. The headline inflation rate came in unchanged YoY for September. That’s right, inflation over the last 12 months has been zero – thanks mainly to falling energy prices and a strong dollar that cheapens imports. The core (ex food and energy) price index was up +1.9%.
Bad news. Low headline inflation in the US means people receiving Social Security payments won’t be given a cost-of-living increase for 2016. Also affected are federal retirees, disabled veterans and people getting help under the federal disability program for people with low incomes. The decision affects more than 70 million Americans.
Good news. With revenue growing faster than spending, the US 2015 budget deficit has declined to $439 billion, the least since 2008. The deficit dropped to 2.5% of gross domestic product, the smallest % since 2007 and below the average for the past 40 years.
Bad news. Treasury Secretary Jacob Lew told Congress that the country would hit the debt ceiling by November 3. Outside analysts estimate that the Treasury would run out of cash between Nov. 10 and Nov 19. See this WSJ article for more.
Debt limit timing and resolution: Either the debt limit is raised in early November or it is suspended until mid-December then raised as part of a debt limit / budget grand bargain. I wouldn’t bet on an early resolution. If history is a guide our fearless leaders in congress will go right down to the wire again.
We lost over 5 minutes of daylight here in Anchorage yesterday. Not my favorite time of year! That trend will continue until December 21 when we finally make the turn.
Jeff Pantages, CFA®
Chief Investment Officer