Many investors are scratching their heads as we reach for 16,000 on the DOW. Much of the reason for the concern tends to be over stock market performance focused so heavily on earnings, but the lack of revenue. As I discussed in a blog a few weeks ago, while earnings expectations are the main focus; how we come to those earnings are an important indicator of economic health and future growth of a company. If those earnings are derived from cutting work force numbers, cost containment, or deleveraging then that does not give a clear path to future success. Strong performers will typically be earnings that come from improving revenue numbers (sales and production). The concern on the market is that while over 75% of S&P 500 companies are beating expectations on earnings; just above 53% are beating revenue expectations.
While equity data has been in focus as the 3rd quarter reports wrap up, Federal Reserve Board (FRB) Nominee Yellen’s hearing was certainly a focus. Her loose stance on tapering the FRB’s current bond purchase program and how unemployment will take a central role in the decision process were welcome with a market rally. A concern in the long-term picture for this would be that the loose monetary stance could lead to a cliff for long term bond investors. This happens as a result of leaving rates too low for too long resulting in a quick over heating of rate and subsequently our economy. If handled correctly, this approach could restore confidence in corporate America, increase hiring, decrease unemployment, and cause an increase in consumer spending (which makes up over 70% of GDP). The key to weathering this as an investor is to not bet one way or the other and make sure that the fixed income portions of your portfolio is well diversified.
Internationally China showed legislative signs of moving their economy from an export focus to domestic consumption focus. This should provide for more stability and growth over the long haul. While we see struggling GDP numbers out of the majority of Europe, we’ve seen the UK show strong economic data and for the EU the weakening of the Euro allows for cheap exports and increased production, which should be felt by the beginning of next quarter. Japanese GDP grew at a rate of 1.9% during the 3rd quarter.
Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.
If you would like an in-depth analysis of your current positions and allocation, please feel free to call Jason Roque at 719-313-7536 to schedule an appointment.
Sources: mfs.com, oppenheimerfunds.com, and morningstar.com
* Financial Action, Inc. is a Registered Investment Advisor.