September 5, 2016
If you are even a casual reader of this Weekly View you will recognize the central theme of sector rotation that has gone on week-by-week through the latter part of summer and continues as we head into the early fall season. The rotation of leadership from the long standing cautious sectors such as Utilities and Consumer Staples has attempted to hand off over to more risk oriented sectors of Technology and Industrials. As we stand with week ending September 2nd this attempt continues, albeit at a snail’s pace along with plenty of uncertainty as to whether it will actually become the trend.
Utilities and Consumer Staples continue to be challenged but are trying to hold onto fragments of remaining leadership characteristics. Consumer Staples is the strongest of the two. Meanwhile, Technology and Industrials continue to hold onto early signs of leadership in the risk oriented sectors. Technology is the most impressive as it goes through the process of digesting its prior strong gains.
Overall, we wait for trends in this rotational/leadership theme to show themselves more solidly. As we stand currently, true leadership from a defensive/cautious perspective versus a more offensive/risk oriented perspective remains a coin toss.
Earnings Recession
S&P 500 earnings growth in the last year has been labeled as an “earnings recession.” Simply, the year-over-year growth rates of earnings for collective S&P 500 companies have been negative for six quarters. The significance of this is that sales and earnings growth are the lifeblood of companies. Its earnings, or lack thereof that makes companies more or less attractive and hence valuable.
In the market and economic crisis of late 2008/09 the focal point is always on that timeframe when the market had a meltdown. Speaking to our current experience and paralleling it a bit to that timeframe; earnings growth had peaked in mid 2007 – over a year prior to said meltdown – and began a steady decline by putting in negative growth rates. Expectations were that the negative growth rates would turn positive soon – which did not occur. Do we have a similar set up developing? The antidote to a potential nasty decline this time around will be the earnings growth expectations actually coming to fruition.
CAM Weekly View July 17, 2016
Per the extended header quote above, back in mid-July the topic of our on-going earnings recession was addressed while stressing the importance of earnings growth to act as an antidote to a nasty decline in our current time relative to the experience we had back in the fall of 2008. Within that Weekly View it was offered we would share accordingly as S&P 500 collective company earnings came in for the 2nd Quarter ending June 30th. With 98% of the companies having reported their 2nd Quarter results to date it appears the earnings recession has ended, albeit marginally.
On an As Reported basis, which is also known as GAAP earnings from companies the year-over-year growth rate was close to 2%. On an Operating Earnings basis they are marginally negative year-over-year. So whether we look at the GAAP method or Operating method the collective earnings results came in generally unimpressive. Importantly though, earnings are not decelerating. Equally important, on the more concerning side, as the quarterly results came in through the summer earnings expectations for the collective S&P 500 companies were reduced. All-in-all, like the structural performance of the S&P 500 itself via SPX9, earnings are better and yet not showing a rip roaring new trend as hoped for via earlier in the year expectations for this mid-summer result.
We continue to watch closely the action of the S&P 500 itself via its structural vibrancy within SPX9. In addition, our vigilant watch on the earnings front continues as we move into 3rd quarter results ending September 30th. Per the header quote, earnings are the lifeblood of companies so as we move into the 3rd quarter results it will be important to see an increase in year-over-year growth rates. Stay with the Weekly View and we will update these trends as they unfold!
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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