Friday, October 24, 2014

Mixed Signals on Earnings

Earnings season is just underway, with about 300 companies having reported their earnings thus far; that's about 15 percent of the reports we can expect this quarter. So far this season, 64.9 percent of companies have beaten the consensus analyst earnings estimates. That's a pretty strong figure, the highest we've seen since 2010.

But that's not the only way to look at things. Just 49.3 percent of companies have beaten their consensus estimates for revenue, which would be a weak figure for that metric. More than half of all reporting companies have beaten their revenue estimates in each of the past seven quarters.

Which is the more reliable measure? Investors would generally prefer to see revenue numbers come in stronger than earnings numbers, because revenue numbers - which simply measure sales rather than profits -  are more difficult for companies to fiddle with. But so far this earnings season, the opposite has occurred.

Thursday, October 23, 2014

Good News for Retirees

If you're retired, you'll see a little bump in your income next year. The Social Security Administration announced Wednesday that people receiving Social Security will get a cost-of-living adjustment of 1.7 percent for 2015. That reflects the modest increase in inflation over the past year.

The 1.7 percent is consistent with the increase we've seen in the past few years. The Social Security adjustment was 1.5 percent for 2014, and 1.7 percent for 2013. But in 2010 and 2011, as the economy struggled to emerge from the recession, there was no cost-of-living adjustment at all.

On the other hand, when the economy is stronger, retirees generally get more of a bump than this. In every year from 2004 to 2009, the adjustment was higher than this year's 1.7 percent - including a high of 5.8 percent in 2009.

Wednesday, October 22, 2014

Tough Times for Big Names

Earnings season is underway again, and there has been some very rough news for some of America's most venerable and best-known brands. Reporting this week:

  • Coca-Cola announced yesterday that its quarterly global soda sales increased by just 1 percent in the third quarter. Coke's shares lost 6 percent on the news, the stock's biggest one-day drop in six years.
  • McDonald's reported that same-store sales dropped by 3.3 percent in the third quarter. Within the U.S., same-store sales fell by 4.1 percent in September alone - the worst domestic month for the Golden Arches since February 2003.
  • On Monday, IBM reported that its revenues in the third quarter dropped by 4 percent, and profits dropped by almost half, to just $18 million for the quarter. It was the tenth straight quarter that Big Blue's sales were flat or declining.

Tuesday, October 21, 2014

Bulls Hanging In There

The volatility that the market has been experiencing lately often signals that stocks are headed for a downturn. But investors have not been reacting that way. In fact, optimism still carries the day, despite the recent losses of the S&P 500 and the Dow Jones.

The American Association of Individual Investors actually saw bullish attitudes rising last week in its weekly survey of investor sentiment. That survey had 43 percent of investors bullish, up 2.8 percentage point from the previous week and higher than the long-term average of 39 percent.

Bespoke Investments registered an even stronger figure. In its weekly sentiment survey, 61 percent said the S&P 500 would be higher a month from now - up 7 points from the previous week. So despite the rough sledding, most investors don't appear to be spooked by this market.

Monday, October 20, 2014

Different Directions for Stocks

Last week was a rough one for the major stock market indexes, with both the S&P 500 and the Dow Jones industrial average losing 1 percent of their value. The S&P is now down 6.2 percent from the high it set a month ago, on September 18; the Dow is down 5.2 percent from its September high.

But it's important to remember that those two indexes aren't the entire market. The Russell 2000 - the most widely used benchmark for small-cap stocks - had a good week, rising by 2.8 percent. In contrast, while the large-cap indexes were doing well for most of the summer, the small caps were suffering, dropping 13 percent between early July and the beginning of last week.

We expect small-cap stocks to be more volatile than large caps, and the Russell 2000 is still down nearly 6 percent on the year. But we may be seeing that particular asset class finally start to turn the corner.

Friday, October 17, 2014

Europe's Woes Continue

The Eurozone had another rough day yesterday, with its benchmark index, the Stoxx Europe 600, dropping to a ten-month low. Most of that damage has happened recently, with the index down by more than 10 percent since the middle of September.

One of the biggest concerns now is that Europe is risking deflation, which would be very dangerous for stock prices. September's inflation rate in the Eurozone was just 0.3 percent, far below the target of 2.0 percent.

The fear among American investors is that problems in Europe will once again have a bearing on stocks here at home. In the globalized economy, that's almost inevitable. The main part of our Web site has a new article, "The Global Village," describing how and why the two markets are connected, and how investors can protect themselves. I encourage you to give it a read.

Thursday, October 16, 2014

The Return of Volatility

The five-year bull run of the stock market has been notable for its relatively low volatility, but it appears as if we're getting back to a rough ride. The S&P 500 index has already moved by 1 percent or more on seven trading days in October. That follows just one such trading day in each of August and September. And there were so much days in either May or June.

The more sophisticated metrics are showing the same effect. The CBOE Volatility Index, commonly known as the VIX, rose by 25 percent on Wednesday to 28.53. That's its highest close since December 2011.

The long-run average for the VIX is 20, which means this market is now well above average on volatility. If it appears even more volatile than normal, that might be because it's been so low in recent months. In July, the VIX got down near 10, a multiyear low-water mark.