Market Outlook from Hutchens Investment Management

PRLog (Press Release) - Feb. 20, 2013 - “The market does not beat them.  They beat themselves, because though they have brains they cannot sit tight.” -- Jesse Livermore

Looking back to early-March 2009, the outlook was for a lost decade for equities with a U.S. economy that would not foster investment and consumer spending, according to David Minor of Hutchens Investment Management.

From an investment perspective, stocks should no longer be held for the long term, if held at all.  The dramatic turnaround in the market from the 665 S&P 500 level further convinced market strategists that equities were no longer suitable for individual investors or other non-professionals.  The evidence of this is the current over $3 trillion held in combined bond and money market funds.  Individual investments often referred to as “dumb money” have missed the 128% rebound in the S&P from its 2009 lows.  Investors who have moved to bonds have fared well by historical standards but those who have remained in money markets (over $2 trillion) show no more real price appreciation.  A reversal in these holdings seems to be beginning, but a trend cannot be confirmed.

The recent earnings season has surprised on the upside although the consensus forecast was a flat to down 4Q2012.  What is surprising is the breadth of the increases in earnings and revenues.  The latest data published by Bespoke Investment Group show that with a week left to earnings season, the beat rate for EPS vs. estimates is at 63.6%, the highest since 4Q2010.  The revenue beat rate of 64% is at its highest level since 2Q2011.  Interestingly, revenues were expected to fare worse than earnings, but have done better as earnings season progressed.  With nearly 90% of the S&P market capitalization reporting, earnings have come in 4.7% above expectations.  Although most analysts’ estimates were too low, a sign of a bottom in the earnings cycle rather than the top, these analysts are now claiming that companies are only beating “analysts” lowered estimates.  For the first quarter 2013 companies are on balance issuing negative guidance with a negative to positive ratio of 3.0.  This has been a continuing theme over the last few quarters.  Realistically there is no benefit of corporate optimism in a time of regulatory or other government uncertainty.  For now, it seems only the analysts believe them.

Research provided by Morgan Stanley shows that all S&P 500 major sectors, with the exception of Telecom (-7.5%), were above 4Q2012 estimates.  Information Technology, with 97% at or above earnings forecasts, was led by CSCO, INTC, IBM, ORCL, and QCOM, all of which released better-than-expected results.  Consumer Discretionary has thus far exceeded estimates by 5.5% for 4Q2012 with an 87% at or above ratio. On a year-over-year basis this sector’s earnings were up 12% in the latest quarter.  Looking out into 2013, consensus estimates are highest for Materials, Telecom and Discretionary.  Downward revisions over the past three months are sharpest for Technology, Materials and Energy.  Given the dismal record of consensus estimates for the past few quarters, we can say with a degree of certainty that these are only estimates and will not hold.  Those bearish market analysts, who have relentlessly cited slow global growth, Europe’s sovereign debt problems, and our own fiscal cliff should focus on quarterly earnings, just like stocks.

Our investment strategy is a full position in equities.  The recent run-up since the beginning of the year and a more bullish sentiment for equities opens the possibility of a short-term correction as the fiscal cliff approaches March 1st.  But in the longer term this is inconsequential as growth with a dose of inflation will be the ultimate catalyst for a sustainable bull market.