Hutchens Investment Management Commentary: Closing the Curtain on 3Q2013 Earnings

CONCORD, N.H. - Nov. 18, 2013 - PRLog -- With 96% of the S&P 500 companies reported, earnings season is just about over and as expected it was uneventful, tracking 4.4% above expectations. Excluding financials this number drops to 3.6%. As widely reported, these earnings are marginally higher than forecast because of the lowered bar. Revenues are 1.0% above consensus and ex-financials at 1.2%. According to the Bespoke Investment Group, the 3Q2013 beat rate was only 58.6%, the second lowest since 1Q2009. Throughout the season companies missing were punished and those beating rewarded. Guidance for 4Q2013, when given, was decidedly bleak with the ratio of negative-to-positive at 6.6, well-below the historical average of 2.5.

Perhaps more interesting to investors has been the rising market throughout this lackluster earnings season. According to many strategists, the negatives abound and a bubble is inevitable, but stocks continue to climb a steep “Wall of Worry.” Washington will soon add budget discussions to the Obamacare fiasco. Political dysfunction is something most astute investors have factored into their strategy. Short term the consumer and his spending patterns remain questionable because of the impact of the uncertainty of healthcare. Unlike other government policies, this disruption is personal and direct. The recent consumer sentiment data indicate caution, which may be translated into weak Holiday spending. The self-imposed budget deadline of December 13th will more than likely add to the confusion. But with so many negatives it is very likely that Santa will pay a visit to the markets before Christmas.

At the conclusion of earnings there is normally less market related news and stocks are vulnerable to media headlines. There is a tendency to focus more on the short term rather than looking beyond 2013 and the potential for the US economy in 2014. Although no one knows when the Fed will begin to taper, the timing should not matter, after all the current QE is long on time and short on effectiveness. In 2014 the economy will grow about 3% in real terms, and earnings and revenues should exceed expectations while margins may shrink as employment and capital spending increase. We will move from a climate of risk on, risk off, to one of less fear and greater opportunity.

Our investment strategy remains long-term positive on equities, but we do see potential for a correction in the not-to-distant future. The confluence of weakening consumer spending, uninspiring 3Q2013 earnings, and the reappearance of Governmental dysfunction during the budget process creates a situation that dictates caution. The underlying strength of the US economy and its potential growth, buoyed by solid financials of corporations, will not be denied longer term.

Authors:

David Minor

Rebecca Goyette

Editor:

William Hutchens