“We’re Hoping That Our Mid-term Grades Will Really Help Our Average”

By David B. Armstrong, CFA | Jul 29, 2013 | Weekly Market Commentary

Ahh – some of the famous words from Mr. Hoover in Animal House that relate to earnings season, more on that later.

The Dow Jones Industrial Average (Dow) hit another all-time high last week but finished essentially flat.  That record high makes it the 28^th time this year that the Dow has logged a record.  For those of you counting, the record is 70 new all-time highs in a calendar year set in 1995.   Healthcare and Tech were the only sectors recording a meaningful gain while the remaining eight S&P 500 sectors were essentially flat or negative.

The upcoming week will be a busy one, as Wednesday will have the initial report of the Q2 Gross Domestic Product (GDP), the Fed’s meeting on interest rates, and the labor report.

Here’s a recap of how the market did last week.

 

Earnings Season – I Love It Less Than Last Week

Last week, I wrote that companies posting negative guidance was DEAD EVEN with the companies posting positive guidance and that may be a sign that companies are more positive about the future.

That got blown out of the water this week as the spread went negative to a -3.20% when a lot of companies lowered their guidance.  That’s a shame since last week was basically the middle of earnings season, so the likelihood of that number going positive is pretty low.

Looks like we will probably see an 8^th quarter in a row of a negative spread between companies raising vs. lowering guidance.

On a good note, the percentage of companies beating their revenue estimate for the 2^nd quarter of 2013 is at 56.3% which is much better than last quarter.  The percentage of companies beating their earnings estimates is also very high coming in at 65.2%.  If that sticks, it will be the highest percentage of companies beating earnings estimates since the 4^th quarter of 2010.

Tech companies are doing the best with 71.3% of companies reporting beating their earnings estimates while Utilities are in last place with only 22.2% beating earnings (Data: Bespoke Investment Group)

More on Upcoming Economic Reports

The upcoming initial report on 2nd quarter GDP will be revised in August and then again in September, but this report will get a lot of attention and press.  With first quarter reported at 1.8% and second quarter estimated to come in around 1.1%, there are a few things to pay attention to.  Consumer spending, which is about 70% of GDP, has been less than stellar and there is the impact on the slowdown in government spending (remaining 30% of GDP).  This sluggish recovery in GDP is a drag on employment.  And while employment has been getting better on paper, there is still a lot of skepticism over how well the employment picture really is for the average American.  This spills over into consumer confidence and spending. The cycle is clear.  The silver lining is that interest rates should stay low and the Fed will keep pumping money into the system.

Looking at the GDP in the context of historical data shows how lackluster the current recovery really is.  In the 15 quarters post-recession end in 1982 showed average GDP growth at 5.29%.  15 quarters post the 1991 and 2001 recessions had average GDP at 3.39% and 2.93% respectively.  Now?  2.10% average GDP growth in the 15 quarters since 2009.

But as I said last week, the stock market is a leading indicator and the economy is not.  The market starts doing better in anticipation of the economy getting better.

As for the Fed Meeting, well, the Fed has stressed it won’t raise the fed funds rate – currently near zero – until the unemployment rate falls to at least 6.5%…it’s currently at 7.6%.

31 days until college football starts.

Please call or email with questions.

Investment advice offered through Monument Advisory Group, LLC a Registered Investment Advisor (RIA). Securities offered through LPL Financial.  Member FINRA/SIPC.  Monument Advisory Group and Monument Wealth Management are separate entities from LPL Financial.

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 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

⁽¹⁾      West Texas Intermediate crude spot price is as of end of week.

⁽²⁾      London Bullion Market Association; gold fixing pricing at 3 p.m. London time.