Employment, Earnings and Time

By David B. Armstrong, CFA | May 11, 2015 | Weekly Market Commentary

Last week was a rough week until Friday rolled around and we saw a 267 point gain on the Dow due to some bullish employment data.  Additionally, the dollar weakened a little bit and the Federal Open Market Committee (FOMC) has upheld that it will keep monetary policy accommodative until we have full employment and price stability is reached.  Be ready for a lot of opinions about where we are with inflation now that the headline unemployment rate is at 5.4%.

Employment

Wow – the unemployment rate has fallen 4.6 percentage points from the high of 10.0% back in the fall of 2010.  Wage growth has gotten a little better but remains weak.  This is closely watched because more wages will ostensibly drive up the demand and price of goods and services, pushing inflation toward the Fed’s long-term target of 2.0%. The flip side to that is higher labor costs, which can squeeze profits and potentially become a drag on corporate earnings growth.

The employment report showed that the U.S. added 223,000 jobs in April, which blows away the 85,000 revised in March.  This adds credence to our position in previous blogs that the first quarter data across the board was probably soft due to weather and other factors, and also that one data point should not be relied on in trying to identify any sort of trend.  See the “So What Do We Think” section of this blog.

Fed Chair Janet Yellen was out with a statement on Tuesday that sounded to traders something like, “These markets are so overvalued you better get the F out right F-ing now or you are totally F-ed you stupid F-ers!” which caused some panicked selling on Wednesday, on the heels of a Tuesday sell-off.  After her words were further analyzed, it turns out what she said was, “Equity market values at this point generally are quite high and there are potential dangers out there.”  The reality is that her crystal ball is no better than anyone else’s.  It’s not a matter of “if” there will be a sell-off, it’s a matter of “when”…and as we have been writing about, we still believe in the growth story.  Our opinion is that the “when” is still down the road.  Investors did and should blow this kind of commentary off.  Research her comments a year ago when she commented about biotech and social media and look at the performance of both sectors since then.

This month extended a record. This has been the longest stretch of monthly job gains (55 months in a row) since WWII.  The previous record ended in June of 1990 at 49 months, which was just before Desert Storm.

Earnings

Another +1000 companies reported their first quarter (1Q) earnings and revenue last week, bringing the total to almost 2300 companies reporting.

According to Bespoke, here’s how we look:

The percentage of companies beating their revenue estimates for the 1Q of 2015 stands at 49.7%, just about dead even with 49.5% last week. 49.7% is currently well below the average of the 60% that we’ve seen since 2000 and well below the final 58.1% from the 4Q of 2014. Since the revenue readings bottomed out in the 4Q of 2011, quarter-over-quarter readings have ping-ponged but the trend has been positive for revenues. We will see how things end up.

The percentage of companies beating their earnings estimates stands at 60.3%, which is another drop from the 62.5% from a week ago. This is below the average of 62% dating back to 1998, and close to the 61.1% final reading from the 4Q 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 were more companies stating they would earn less in the upcoming quarter than the same quarter a year prior. That’s 2.5 years of pessimism coming out of corporate America.

After two flat quarters in the 1Q and 2Q of 2014, we saw the 3Q of 2014 revert back to a negative reading. The final reading for the 4Q of 2014 shows that the spread between companies posting negative guidance versus companies posting positive guidance in the 4Q was a whopping -9.4%! This was the worst spread reading since the last two quarters of 2008. The current reading got a little better over the week moving from -3.5% to -3.0%, which even though it is a negative reading, it’s a huge improvement from the 4Q reading of -9.4%.

Please call with questions.  If you want to know what to do now, please see the comments from my blog last week…or see the advice from at the bottom of this blog called Irrational Exuberance which I penned in December…of 2011.  Until something dramatically changes in the economy, our advice, which so far has been solid, remains the same.

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