So far, so good. The third quarter is history and earnings
reports and economic statistics are now coming in.
So far, so good. The third quarter is history and earnings reports and economic statistics are now coming in.
On the earnings side, about 25 percent of the S&P 500 companies have reported and earnings are coming in better than expectations, easily up from the same quarter last year and likely up from the second quarter of this year. That comes as no surprise, given the strength of the economy. The GDP report for the third quarter does not come out until Oct. 30, but it looks like real GDP rose between 5 percent and 6 percent for the third quarter.
Now, many analysts who had underestimated earnings and/or GDP for the third quarter are in the “yes, but” mode. They are saying “yes, earnings and the economy came in strong for the third quarter, but both are slowing again in the fourth quarter”. Actually, they may be right this time; it looks to like real GDP growth will drop back to around 3 percent to 4 percent in the fourth quarter. But that may not imply any fundamental retrenchment.
Rather, consumer spending is slowing a bit from a white hot pace in the third quarter and retailers are just starting to recognize that inventories are way too low and need to be replenished. A brief slowdown in the fourth quarter should be followed by a sustained recovery throughout next year as production, employment, inventories, capital spending and earnings move higher.
Meanwhile, buy your holiday presents early, because popular items may sell out.
Rarely is the investment horizon completely cloudless and now is no exception. The mutual fund scandal involving late trading and market timing continues to unearth unethical or criminal practices at some fund companies. As for the fund companies involved this appears to be a set of isolated acts by some unethical employees, not a company wide practice. And, in all cases, management is taking vigorous measures to investigate, halt, change policies and make restitution where necessary. At present, this process should not create additional fund or market risk.
The economy may slow a bit in the fourth quarter and then reaccelerate early next year. Company earnings should continue to move higher and outpace expectations. Adding it up, remain guardedly optimistic for equity market returns going forward.
Dan Newquist is a registered representative with Linsco/Private Ledger. His office is in downtown Morgan Hill.
