Lux Libertas

Last week was a sad week for college basketball fans. Dean Smith, the former head coach of the University of North Carolina men’s basketball team, passed away at the age of 83. He was revered by all those who knew him and he was incredibly successful at what he did. You could describe him as the Warren Buffett of coaches – he had only one losing season in 36 years as UNC’s head coach.  Can you imagine an investment manager only having one down year in a 36 year stretch?  That’s practically unheard of.

If you’ve visited the About Us section on our website recently, you’ll see that our Financial Planning Associate, Ann Schnorrenberg, is a UNC alum.  Did you know that she was there when Dean Smith led the Tar Heels and Michael Jordan to their first national championship?  MJ, if you’re reading this blog and need wealth management services, please contact us.

Okay, on to the markets. U.S. stocks increased in the first week of February, which was led by the Energy sector.  When was the last time you read a sentence like that?  It seems like every week it’s just the opposite, since, you know, oil prices have fallen by 50% since June of last year.

Aside from oil, what was behind the rally?

A strong jobs report.

The economy added 257,000 jobs in January, which exceeded analysts’ expectations, and the government also revised the prior two months’ figures upward bringing the job creation for 2014 to 3.12 million.  The last time we experienced that kind of growth?  The same year that everyone was worrying about the Y2K bug: 1999 when 3.18 million jobs were created.

The chart published by Bespoke Investment Group below shows how many jobs were added or lost each month and it goes back ten years.

Take a look at the two streaks that we’re currently in the midst of: twelve straight months with over 200,000 jobs added and five straight months with over 250,000 jobs added.  More workers means businesses are growing because the economy is getting stronger.  More workers also means more people with money in their pockets to buy goods and services.  Needless to say, the stock market loves it when you see both of those things occurring.

Earnings

We follow Bespoke Investment Group for earnings research, and here’s where we stand so far in terms of companies that have reported their earnings and revenue for the fourth quarter (4Q) of 2014.

• The percentage of companies beating their revenue estimatesfor the 4Q held steady at 56.7%, which was roughly the same reading from last week and is below the average of 60% that we’ve seen since 2001.  As a point of reference, the 3Q of 2014 came in at 57.2% and the 2Q came in at 60.7%. Since the revenue readings bottomed out in the 4Q of 2011, quarter-over-quarter readings have ping-ponged but the trend has been steadily moving UP for revenues.

• The percentage of companies beating their earnings estimatesis at 62.8% which is slightly down from last week’s reading of 63.5%.  This is still above the 1% final reading from the 3Q of 2014, and well above the 58.6% final reading from the 2Q of 2014.

Bespoke also publishes a chart that shows the spread between companies guiding future earnings higher or lower on a percentage basis.  Up until the 1Q of 2014, the spread had been negative for the TEN previous quarters, meaning there are more companies stating they will earn less in the upcoming quarter than the same quarter a year prior.

Sounds horrible, right?  Well maybe not, considering that the S&P 500 was up 46% over that same time period.  It seems like CEOs are being overly pessimistic   about their earnings outlook.

As of Friday, the spread between companies posting negative guidance versus companies posting positive guidance in the 4Q stood at -9.6%, which would be the lowest reading since the 3Q of 2008.  Before you start running for the hills trying to call the top of the market (which we don’t advocate doing), keep in mind that a large portion of the negative guidance is driven by Energy stocks.  Stay tuned for a few more weeks to see where the final number comes in.

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