Global growth slowing? Maybe…but it’s not stopping.

By David B. Armstrong, CFA | Apr 18, 2011 | Weekly Market Commentary

It seems to us that the global economy is beginning to cool.  But we want to point out that “cooling” is different than “stopping”.  Obviously, higher gasoline prices will (or have already begun to) weaken consumer spending in the U.S., and recent tighter monetary policy in China has curbed demand there.  Additionally, Japan is struggling after a record earthquake and Europe is battling a debt crisis that claimed Portugal as its third victim.

As for the equity markets, well, we witnessed the second straight week of declines.  We have a few thoughts…

The equity markets we track were all slight losers last week.  The Dow Jones Industrial Average (DJIA) lost -0.31% to finish at 12,342, the S&P 500 Index lost -0.64% to finish at 1,320 and the Nasdaq Composite Index lost -0.57% to finish at 2,765.  The Russell 2000 index, which tracks the performance of small capitalization stocks, lost -0.70% to finish at 835.

With about 10 percent of S&P 500 companies’ results in the books, it appears that companies are beating expectations at a solid rate again, but not by as much as we have seen in previous quarters.  After beating estimates collectively by between 5 and 10 percent over the past seven quarters, S&P 500 earnings are only tracking about one percent ahead of estimates thus far. Furthermore, consensus expects a 12 percent increase in EPS versus the prior year. Revenue upside thus far is also limited at 0.7% ahead of forecasts.

Food and energy prices continue to surge, but core inflation remains tame. The March consumer price index (CPI) report showed that inflation (excluding food and energy) remains subdued; however, both food and energy prices continue to surge.  Currently, at a reading of 1.2%, core inflation remains below the lower end of the Fed’s unofficial comfort zone of 1.5 to 2.5%.

And that is where we are now.  We are looking for revenue growth during this earnings season.  Without revenue growth, we just don’t think that companies will impress anyone and the market action will reflect that disappointment.

Call us for help or if you have any questions. 

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**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.