| 9-July-10 | 2-July-10 | Weekly% Change | YTD% Change | 12 month %Change | ||
| S&P 500 Index | 1,077.96 | 1,022.58 | 5.42% | -3.33% | 22.62% | |
| Dow Jones Industrial Average | 10,198.03 | 9,686.48 | 5.28% | -2.21% | 25.18% | |
| Nasdaq Composite | 2,196.45 | 2,091.79 | 5.00% | -3.20% | 25.08% | |
| Wilshire 5000 | 11,225.81 | 10,654.14 | 5.37% | -2.36% | 24.73% | |
| MSCI EAFE (Intl.) | 1,414.96 | 1,347.38 | 5.02% | -10.49% | 12.19% | |
| 10 Year U. S. Treasury Yield | 3.05% | 2.98% | 2.35% | NA | NA | |
| 30 year U.S. Treasury Yield | 4.04% | 3.94% | 2.54% | NA | NA | |
When playing poker, experts look for something they call a “tell” in their opponents. It could be a certain frown, or a sigh, or pursed lips or any number of other subtle things an opponent does when he is either feeling like he has a good hand or a bad hand. The expert then tries to exploit that “tell” to win hands of cards.
The market—the collective price that millions of investors determine through their individual actions every day—also has a “tell.” It moves in anticipation of (or reaction to) an event. In 2008, investors reacted to collapsing banks by selling stocks in the anticipation that they would go down further. In fall of 2009 investors bought stocks after they had gone up (a reaction) in anticipation that they would go up more. This spring, investors reacted to Europe and sold stocks, anticipating that they’d go down further.
Then came last week. In fairness, the gains of more than 5% for our major stock indices may have been a simple oversold bounce. We did, after all, lose about the same amount the week prior. I don’t think that’s the case, though. You see, today is the kick off of earnings season, and earnings are expected to be good.
Alcoa (AA) reports earnings today, and by next week we will see the floodgates open with dozens of reports coming in daily. Compared to a year ago, earnings for S&P 500 companies are expected to be 42% higher. In that same year, the price of the S&P 500 has only gone up by about 17%. While earnings and market prices are not well correlated over short time frames like a quarter or a year, over time, stock prices grow as earnings grow.
I’ve written for a few quarters now that the big bounce in stock prices off of last year’s low mark is probably over and that future gains would need to have the support of earnings growth. So far so good on that metric, but analysts are increasingly concerned that the earnings growth we’ve seen has been coming from cost cuts. Many are looking for rebounding sales as the next “tell” for the markets. Can companies sell more products to grow earnings, or will future growth have to keep coming from slashing expenses? Forward guidance from management teams will be important in this reporting season.
Did the smart money give a classic “tell” last week by bidding up prices before earnings, or were the gains we saw simply a bounce? We err on the side of believing that earnings can continue to grow strongly. That said, we agree with other analysts who would like to see revenue growth confirm the sustainability of that earnings growth.
Coming Up: The flow of financial news will be heavy this week. We will have earnings, as discussed above, and some important companies will release results. Among them are Intel (INTC), JP Morgan Chase (JPM), Google (GOOG) and General Electric (GE). In economic news, June retail sales will be released on Wednesday, Industrial production will come in Thursday and consumer prices (CPI) hit on Friday. All metrics are expected to decline slightly from May.
The views and opinions contained herein are those of Bellatore Financial, Inc. and have been researched and analyzed by Kane S. Cotton, Chief Investment Strategist, Capital Allocation & Management.
All Indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The NASDAQ Composite Index measures the performance of all issues listed in the NASDAQ Stock Market, except for rights, warrants, units, and convertible debentures. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Dow Jones is computed by summing the prices of the stocks of 30 large companies. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks traded on the major exchanges around the globe. The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. headquartered equity securities with readily available price data.
Capital Allocation & Management is a managed money program offered through Bellatore Financial, Inc. 10.115.c.07.10