There is an air of anticipation on Wall Street. Will the new administration over-shadow the dismal fourth-quarter earnings? Has the expected bad news …
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There is an air of anticipation on Wall Street. Will the new
administration over-shadow the dismal fourth-quarter earnings? Has
the expected bad news on retail sales for December and corporate
earnings already been baked into the stock prices? This will be an
interesting few weeks as many new things unfold — some very
positive such as a new stimulus plan, and some very negative.
There will likely be a lot of news based on earnings at S&P
500 companies, now expected to have tumbled 20.2 percent in the
fourth quarter of last year from the year-ago period, according to
Thomson Financial. The ratio of negative to positive
pre-announcements has jumped to 3.6 to 1, its highest level since
2001, during the last recession. The results are not only financial
companies as the earnings weakness has spread to many sectors of
the economy. Now seven out of 10 sectors of the S&P 500 are
expected to post negative growth.
Earnings revisions have been coming down about 4 percent to 5
percent per month showing the dramatic change in expectations.
(S&P, Bespoke, and TheStreet.com)
There are widespread concerns about many companies’ ability to
hit revised revenue and earnings guidance, for example Intel which
reduced guidance twice before reporting earnings. Revenues were
down in 2008 as much as they were in 2001 on a percentage basis,
and management expects the business to recover in the second half
of 2009 after customers reduce inventory in the first half.
Firms in traditionally defensive sectors, such as health care,
consumer staples, and utilities are the only ones expected to have
posted any profit gains during the fourth quarter.
Dr. Jerry Webman, OppenheimerFunds economist, states in his 2009
outlook that despite the difficult recession, a significant broad
expansion is unlikely this year. “Lest we get too negative, I want
to be perfectly clear that, although I am not forecasting robust
growth in 2009, I do believe that the most intense parts of the
economic and financial market downturns are moving behind us. As a
result, I do believe that 2009 will be a better year for investors
than was 2008.”
Nonetheless, Webman states, this will be a year of economic
stabilization but not a return to business as usual. This is not
2003. We won’t resume big consumer spending or see rising home
prices anytime soon. Strapped consumers are likely to continue
tightening their belts and repairing their balance sheets in the
face of rising unemployment and still-tight credit conditions.
The challenge for corporate America will be to grow revenues in
a de-leveraged environment, which may be difficult for businesses
who historically borrow to expand. Instead, businesses will likely
shelve spending plans and draw down inventories until the outlook
for the consumer improves.
Over time I believe consumers will continue to reduce debt and
increase their personal savings, and confidence will improve. In
the short-term unemployment will likely rise, a typical trend at
the tail end of a recession. This could result in a continued cycle
of rising defaults leading to more bank write-downs leading to
tighter lending conditions. Improvement is unlikely until this
vicious cycle is halted.
With businesses unable to break the cycle the federal government
has stepped in with leverage and cash the private sector could not
muster. The Treasury can borrow when you and I can’t, and the
Federal Reserve can expand its balance sheet and lend when the bank
on Main Street won’t. However, the revision of TARP and the new
stimulus plan is designed to help. Recapitalizing banks and
creating good credit flow along with jobs creation may go a long
way to break the downward cycle and turn the economy around.
Webman states that fortunately for investors, you do not need
robust economic growth to generate returns in 2009. Given the fear
gripping the markets, only modest improvements in economic activity
will be required to move careful investors closer to their
Excerpts taken from Dr. Jerry Webman 2009 economic forecast.
Patricia Kummer has been an independent certified financial
planner for 22 years and is president of Kummer Financial
Strategies Inc. at 8871 Ridgeline Blvd. in Highlands Ranch. She is
a financial consultant offering securities through SagePoint
Financial Inc., and Investment advisory services through KFS Inc.,
a registered investment advisor not affiliated with SagePoint
Financial Inc. She welcomes your questions at www.kummerfinancial.com. The
views expressed are not the opinion of SagePoint Financial Inc. and
should not be construed as an offer to buy or sell any securities.
Investing is subject to risks including loss of principal invested.
Past performance does not guarantee future results.
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