As I've been saying, profits need to improve before we can see a sustained rally
Bloomberg has a great article this morning that repeats what I have been saying for a while now. Yes the stock market is a leading indicator, but until companies are actually able to grow and report profits the current rally will likely do little more than lead everyone who is hopping on off of a cliff.
The market has come too far, too fast. Everyone is wishing upon a star and hoping that things will get better. The rally has fed upon itself as investors who are afraid to miss out on the next big bull run have hopped on. After losing more than half its value, the S&P 500 took only 19 trading days to rally 25%. This is the fastest rise since FDR rolled out the New Deal.
Ultimately at the end of the day it's earnings that drive stock prices and nothing else. A sustained rally cannot happen until earnings begin to improve, or at least stabilize. The earnings for S&P 500 companies have fallen for six straight quarters. A Bloomberg survey expects this earnings decline to continue for at least the next several quarters.
Companies begin reporting first quarter earnings tomorrow. According the consensus estimate of more than 1,700 analysts, the earnings for companies in the S&P dropped by 37% in Q1. These analysts are predicting that earnings will slide by 31% in Q2 and 18% in Q3 before rising in Q4. Uhhhh, I doubt it. Even if earnings don't continue to gall as rapidly, don't expect them to soar either.
Financials are going to have to help out in order for the S&P as a whole to show an improvement in earnings. Despite showing some signs of life in January and February, both Bank of America and JPMorgan recently said that business wasn’t as strong in March.
And the commercial property writedowns haven't even started yet. The number of commercial property loans in default or foreclosure skyrocketed 43% in Q1 according to data from Real Capital Analytics Inc. show. Commercial real estate values have fallen at least 30 percent since the 2007 peak and may drop 11 percent more this year, Frankfurt-based Deutsche Bank AG’s real-estate unit said in a March 25 report.
This rapid increase in defaults will likely force major banks like Citi, BofA, and JPMorgan to increase write downs and loan-loss provisions on their commercial property loans, which they all are currently carrying on the books at 100% of their face value.
The statement by Stephanie Giroux, chief investment strategist for TD Ameritrade, in the article is right on the money. She believes that:
The government’s plans to kick-start growth don’t guarantee a rebound in earnings and stock prices because consumer spending, which accounts for about 70 percent of the U.S. economy, will stagnate for years as Americans pay debts and businesses cut jobs.
Americans’ debts have remained near all-time highs even as they reduced spending, because people thrown out of work are depleting savings and tapping credit cards. U.S. household borrowing, which has ballooned almost 11-fold since 1980, equaled $13.8 trillion at the end of 2008, or 0.5 percent less than the record reached earlier in the year, according to data compiled by Bloomberg.
“You’ve taken a big engine of growth out of the system for a while,” TD Ameritrade’s Giroux said in an interview. “We are going to be confronted with sub-par growth as we dig out of this hole. The consumer has really driven growth in the economy, and the stock market is a proxy for that growth.”
Exactly. I can't understand why more people can't see this.
S&P 500 Can’t See Enough Money to Feed Stocks’ Rally