Earnings in Third Quarter Topping Estimates – Net Net Bull Is the New “Turkey”

By C. Jonathan Camarda
CMT®, CPWA®, CFP®, ChFC®, CLU®, CFS®, BCM®

Equities are riding the momentum of better-than-estimated corporate earnings. We are 75% through earnings season, and over 70% of companies have topped their estimates. Moreover, with global manufacturing data—surprising to the upside and global monetary stimulus—this has made equities the “de facto” destination for investors’ money. To recap, after China’s devaluation of the Yuan in August, this devaluation initiated the downward spiral in equities through September, which essentially caused the Federal Reserve to halt rate increases in September and last month. That non-action worked out well—as we had an attractive run October and a lucrative start to November for the stock market.

There is a little consternation by some of the actual “wind” behind the “sails” of the recent equity run. In retrospect, it appears the Yuan devaluation was in advance of an assumed rate hike, in the U.S. China’s equities plummeted 40% from their June high but have found stabilization after the Fed’s non-hike. In addition to this, global stocks have all been fueled by easy money policies. The Fed appears to be like the “parents” not wanting to hear their “kids” cry, thus allowing them to “play” longer (i.e. no rate hikes thus far).

However, the Fed does want to raise rates; make no mistake as that was mentioned by Janet Yellen in October’s meeting. Jobs data, for October, was overwhelmingly better than September and the expectations present a quandary for the Fed. The Fed does not want to suck the air out of this rebound “balloon”; however, with stellar employment data (which would be pro rate hike), this seemingly gives them carte blanche to take that imminent rate action. This is a very intriguing juxtaposition. Maybe not to most of you, but I obsess about these things (note to self: prescription running low). The bottom line is this: if the Fed pauses hitting the “hike” button, then stocks will ride higher than Santa’s sleigh.

Finally, as we look at the equity picture in more detail, this year is looking very similar to 2011 where we peaked in May and bottomed in October. Another note as we round out the year and head into holiday season, consumer services (think fun products of companies like Tiffany’s, BMW, and Apple) are beginning to gain real steam while consumer staples (think shampoo, food and beverages, etc.) are showing some strain. This is a positive for the market as when rough waters hit (i.e. August and September) investors cling to “staples”; however, when risk tolerance rises, consumer discretionary-services outperform. This—in confluence with the seasonal bullish bias—will lend to this trend continuing through year end.

Share this post:

Share on linkedin
LinkedIn
Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter