Hutchens Investment Management: "Here We Go Again"

CONCORD, N.H. - April 3, 2013 - PRLog -- With earnings season set to begin in a little over a week, the most recent ISM data falling back to the December 2012 level, and the housing recovery set for a slowdown because of a lack of inventory, the bears are gathering to exploit the "inevitable" slowing economy, according to David Minor of Hutchens Investment Management.

Never mind that the contagion from Cyprus turned out to be a non-event, the European slowdown has been known for over a year, and the Chinese economy is picking up but still is erratic.  What's important will be the employment data, which is expected to show more moderate net new jobs, on Friday.  We would expect "headline news" to dominate the short-term market over the next few weeks.  Almost everyone concedes that a sell-off is coming, but this has been anticipated since late February.  Longer term the supply/demand equation, on balance, favors equities over fixed income.

Similar to the last few quarters, negative earnings preannouncements dominate.  As of this writing, 86 companies have issued negative EPS guidance and only 24 have issued a positive outlook.  This marks the fourth consecutive quarter that the percentage of negative guidance has been above 70% at the end of the quarter.  Over this period the S&P 500 rose 13.7% despite the high level of negative preannouncements.  Notwithstanding the broad dissemination of guidance the reliability is questionable.  For 4Q2012, of the 113 companies issuing guidance (79 negative, 34 positive) 74% reported actual earnings above guidance, 21% reported EPS below guidance and 4% equal.  This has been the trend over the past four quarters.  Also, over this period earnings were above analysts' expectations, beating on both earnings and revenues.

Looking out into 2013, analysts are once again reducing their earnings estimates.  Earnings expectations for this year have declined substantially since year-end 2012, falling from $121 to $112 today.  First quarter estimates are now at levels attained during the previous four quarters.  Consensus earnings estimates for 1Q2013 are only 1% above 1Q2012.  Moderation in near-term estimates have come across the board, led by technology, healthcare, telecom, and materials.  Utilities and financials were the only sectors experiencing upward revisions since the beginning of the year.

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 if there is an earnings shortfall.  Longer term this is inconsequential as earnings growth rebounds later in the year and along with a dose of inflation will be the ultimate catalyst for a sustainable bull market and deficit reduction.