MorningWord 12/12/13: Despite yesterday’s 1% sell off in the SPX, there seems to be universal optimism among the investment community that the Fed’s fairly imminent Taper of bond purchases has more to do with a strengthening economy as opposed to the simple notion that all good things have to come to an end. At some point, it must have dawned on central bankers and politicians that appointed them that the most logical and forward thinking thing to do now would be to guide our economy out of crisis mode and back into normal mode. I keep hearing statements about how far the housing market has come, the encouraging signs of the slight increase in employment, the positively trending manufacturing data and the abatement of headwinds from budget/debt issues in D.C. as reasons for the the Fed’s willingness to take their foot off of the easy money pedal. They all add up and it has been a long road to this point after trillions of dollars of monetary stimulus. I find it fascinating that this long after the financial crisis, we are still debating the course of crisis monetary policy.
It appears that the financial pundit community is in agreement that the Macro investment backdrop has improved fairly dramatically over the course of 2013. Yet what seems fairly apparent is the Micro still appears to be a bit strained. Just yesterday, there were two fairly high profile earnings disappointments from two very different companies, COST and JOY, which speak to weakness both here and abroad in consumer spending and stagnant industrial demand. And this morning, there are two disappointments from the likes of CIEN and LULU, again one speaking to weak corporate spending while the other points to a very fickle consumer. The list goes on and on, and of course there are plenty of earnings beats as well, but most come from a dirty little secret pointed out by Cullen Roche who writes the Pragmatic Capitalism Blog. He notes, via Thomson Reuters, that U.S. companies’ negative to positive guidance ratio has hit an all time high, meaning they are guiding next quarter lower, resetting expectations, and then beating those lowered expectations.
From Thomson Reuters:
In this context, our obvious takeaway is that for all the talk of macroeconomic figures, political developments, and central bank policy, the corporate earnings environment in 2013 has been strained. Earnings growth has been tepid. But more concerning is the lack of enthusiasm for 2014 earnings growth among the companies themselves. We’ll trust their word over tangential projections from market strategists and economists.
Does that matter for markets though? We’ve highlighted that this market rally’s health rests on the psychology of its participants much more than on all the data in the world. That’s why QE matters, that’s why technical levels matter, and that’s why weak earnings growth has NOT mattered for 2 years now. If and when that psychological backdrop changes, traders better be nimble to throw out the 2013 playbook, which has been a simple one – Buy every dip.