In­vestors face quag­mire of fall­ing earn­ings, higher rates

Kuwait Times - - BUSINESS -

NEW YORK: In­vestors may wade into un­known ter­ri­tory next month as the Fed­eral Re­serve read­ies the first rate hike in nearly a decade amid a cor­po­rate earn­ings re­ces­sion. S&P 500 earn­ings are on track to close their first re­port­ing sea­son of neg­a­tive growth since the Great Re­ces­sion and es­ti­mates call for sub-zero growth in the cur­rent quar­ter as well.

Even if the trend re­v­erses next year, as ex­pected, a Fed rate hike in De­cem­ber could mark an un­prece­dented con­flict be­tween a tight­en­ing cy­cle start­ing at the same time as earn­ings fall into re­ces­sion.

“We can’t think of any in­stances when the Fed was hik­ing dur­ing an (earn­ings) re­ces­sion,” said Joseph Zidle, port­fo­lio strate­gist at Richard Bern­stein Ad­vi­sors in New York. “In the last six months one can point at a lot of dif­fer­ent things. But if you think about fun­da­men­tals, fall­ing cor­po­rate prof­its and the threat of ris­ing rates” are be­hind the mar­ket stalling, Zidle said.

With more than 90 per­cent of S&P 500 com­po­nents hav­ing re­ported, S&P 500 earn­ings are down 0.9 per­cent in the third quar­ter. Ab­sent sur­pris­ingly high num­bers from the com­pa­nies left to re­port, it will be the first neg­a­tive growth quar­ter since the third quar­ter of 2009. Fourth-quar­ter es­ti­mates are for a 2.4-per­cent earn­ings con­trac­tion, ac­cord­ing to Thom­son Reuters IBES data; that would set up the two quar­ters of de­clin­ing earn­ings, re­quired for a bona fide ‘earn­ings re­ces­sion.’

That al­ready occurred in the sec­ond and third quar­ters, ac­cord­ing to Fac­tSet Re­search Sys­tems, which cal­cu­lates its quar­terly re­sults slightly dif­fer­ently than does Thom­son Reuters.

Fur­ther­more, the de­cline in rev­enue has been steeper than that in earn­ings, a bad sign for in­vestors who like to put money into com­pa­nies that are grow­ing sales and not just cut­ting costs or buy­ing back their own shares. Last quar­ter’s sales are seen fall­ing 4.3 per­cent and es­ti­mates for the cur­rent quar­ter are for a 2.7-per­cent de­cline. It is hard to ar­gue that those num­bers cor­re­spond to an econ­omy that is on the brink of be­com­ing too hot and in need for mon­e­tary pol­icy tight­en­ing.

The bulk of the S&P 500’s earn­ings de­clines come from the en­ergy and ma­te­ri­als sec­tors as com­mod­ity prices have tum­bled to multi-year lows.

The Fed, then, could be look­ing at the earn­ings de­cline as it does low in­fla­tion: A prob­lem that will take care of it­self once the de­clines fall out of the com­par­isons.

But if the Fed does de­cide to raise rates de­spite the gloomy earn­ings, that could hurt in­vestors who may get whip­sawed by the diverg­ing cy­cles in the mar­ket and the econ­omy.

Con­ven­tional wis­dom calls for a de­fen­sive po­si­tion - buy­ing health­care, sta­ples and tele­coms - when cor­po­rate prof­its are fall­ing, and ag­gres­sively buy­ing cycli­cals like en­ergy and ma­te­ri­als at the start of a tight­en­ing cy­cle. Both are hap­pen­ing at the same time.

“Ris­ing in­ter­est rates are al­ways a neg­a­tive for stocks, pe­riod,” said RBA’s Zidle. “In most (tight­en­ing) cy­cles, cor­po­rate prof­its are boom­ing so much that the rise in prof­its is more than off­set­ting the drag of in­ter­est rates.”

FED PREP­PING MAR­KETS

The Fed main­tains its mantra of be­ing data de­pen­dent when it comes to tight­en­ing mon­e­tary pol­icy, and though it has strongly hinted of a De­cem­ber move, it also has ac­knowl­edged that it watches stock prices. In­vestors are re­act­ing ac­cord­ingly: Last week the S&P 500 came within 1 per­cent of its record high set in May, but Fri­day it was on track to close its worst week in two months.

“Since 2013 ev­ery time the Fed sig­nals a rate hike (the stock mar­ket) throws a tantrum, and that’s a lit­tle bit of what we’re see­ing now,” said Michael Arone, chief in­vest­ment strate­gist at State Street Global Ad­vi­sors’ US In­ter­me­di­ary Busi­ness in Bos­ton.

“Over the last couple years, ev­ery time this has hap­pened the Fed has de­cided not to raise rates so we shall see if that cy­cle is bro­ken in De­cem­ber.” — Reuters

NEW YORK: Traders work on the floor of the New York Stock Ex­change on Fri­day. Re­tail­ers were plung­ing Fri­day as earn­ings re­ports from Nord­strom and oth­ers touched off in­vestor wor­ries that the hol­i­day shop­ping sea­son will be a dud. —AP

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