“Off The Wall” Blog
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Is it a Great Time to Invest?
By David B. Armstrong, CFA | Aug 18, 2014 | Weekly Market Commentary
There has been some up and down to the markets over the past few weeks and it has caused a lot of people to ask “Is this the start of a major correction?”
I’m not saying that we can’t see more of a drop in the market from here, but here are some reasons why I don’t think we’ll see something that most investors would consider to be a ‘crash’.
First, there is just not a whole of lot of credit being extended to the average Joe. Believe it or not, it’s still not easy to get a mortgage. Normally, you see a lot of credit building up prior to something like a recession.
Second, we have a pretty favorable economic situation going on. Growth is accelerating around the world (yes, in some places more than others), earnings season ended up pretty well and revenue is growing also (more below). Equities are not real frothy in terms of valuations, the economy is generating new positions, and the confidence of small businesses has been trending upward since 2009.
The current geopolitical environment is creating some volatility and tension; however, we have seen this type of friction over and over for the past five years (in terms of scale and impact). I’m not downplaying the tragedies; I’m just saying that from a global economic impact, the current issues are no more impactful than all the other issues over the past five years of this bull market rally.
For the week, the S&P 500 finished up nicely relative to the Dow while the small-caps regained some ground but are still under-water for the year. Health Care, Tech, Consumer Staples and Industrials all outperformed the S&P 500 for the week.
Second quarter earnings season has come to an end with more than 2,400 companies reporting.
Here’s where we stand according to Bespoke:
- The percentage of companies beating their revenue estimates for the second quarter ended up at 60.7%. This number is above the average of 60% we’ve seen since 2001 and above the 56.0% that finished up the first quarter of 2014.
- The percentage of companies beating their earnings estimates finished up at 58.6% which is also above the 56.7% final reading from the first quarter of 2014.
They also publish a chart that shows the spread between companies guiding future earnings higher or lower on a percentage basis. Up until the first quarter of 2014, the spread had been negative for the TEN previous quarters, meaning that there were more companies stating they will 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.
BUT, that ten-quarter run came to an end in the first quarter of 2014 with a BARELY positive reading. Hopes for two positive quarterly readings came to an end last week as this reading came in negative, albeit a small negative number. But two essentially flat quarterly readings are actually an improvement over the ten previous quarters when the reading was very negative.
The Health Care, Financial and Technology sectors were the three sectors that had revenue and earnings beat rates better than the S&P 500 overall readings.
So, here’s something else I’d like to point out. These great Economist magazine covers come from our friends at Dorsey Wright & Associates. They point out that the financial news and magazine covers are great contrarian indicators. Take a look at the magazine covers below – the first cover is from June 30, 2007. As you may remember, this date was right before the market peaked. From there you will see the next cover which was from April 25th, 2009 which was about two months after the market bottomed in March of 2009. It’s titled “A glimmer of hope?”
Their point is that is common to see very bullish magazine covers close to market tops and a little melancholy towards the bottom. Note the October, 2011 cover from when the market was off after a rough late summer. The title of “Nowhere to hide: Investing during a time of crisis” was the cover during that time.
Just a couple of weeks again the cover of the Economist came out with cover that had a horse jockey wearing a flag riding a tortoise with the title “America’s lost oomph”
That’s not bullish…so draw your own conclusions.
Thanks Dorsey Wright & Associates www.dorseywright.com
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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