As mentioned on this blog before, Lara Hoffmans (co-writer of several NYT bestsellers with Ken Fisher and managing editor at MarketMinder.com), is a mad capitalist genius. She’s also a great writer and a tremendous wit. Now she’s writing forForbes. Check out her first article here:
S&P Temper Tantrum — Lara Hoffmans, Forbes
With markets jittery and dipping into correction territory, here’s a follow up to my recent entry, Economy versus Earnings:
According to Thomson Reuters, as of July 29th:
- The S&P 500 estimated earnings growth rate for Q2 is 10.3% based on companies reporting thus far. (16.3% if you exclude Bank of America)
- 73% of the 327 companies in the S&P 500 that have reported have beaten estimates
Of course, earnings are backward-looking (they describe the past, not the future). But what this illustrates is that corporate earnings (part of the heart and soul of stock investing), are in fine shape right now.
Also, see my “Market yips” entry from June 16th: “Big up years, up a-little-years, and down years all have big individual up and down days. Stick with your strategy and don’t let market down days yip you into mistakes.” We can add to that: corrections routinely happen during perfectly fine market years, too.
Days like the ones lately aren’t easy to swallow, but getting whipsawed by a market correction is far worse.
Maybe the most amazing thing about S&P’s announcement on the US fiscal situation is that anyone got riled up about it. Here is a good primer on the report, if you haven’t seen it firsthand. We’ve seen many similar declarations—and years ago—from 60 Minutes to The Wall Street Journal.
That I can see, the report didn’t include any new information other than S&P’s own opinion on the matter. S&P cites a relatively large deficit, rising debt, political gridlock—these have been known to bond investors for a long time, yet yields remain tame and government bond auctions are far oversubscribed. Notably, Treasury yields were down yesterday (4/18/2011), and the dollar was stronger (an ironic twist on the whole “risk on/risk off” situation I’ve before noted on this blog as nonsense).
S&P highlights entitlement programs (Social Security, Medicare, and Medicaid) as “the main source of long-term fiscal pressure.” But entitlements are not the equivalent of debt and can be changed by Congress. Government debt could reach troublesome levels at some point, no doubt, but not in a timeframe that matters to stocks near term. This, and eventual similar reports from other ratings agencies (they tend to move together), could even hasten the political response by enabling politicians to use the AAA rating as a rallying cry to push through unpopular measures like entitlement and other spending cuts…and possibly higher taxes (gulp).
Either way, stay cool: this report’s gusto shouldn’t sink stocks longer-term.