“Earnings are still good in general, but it is a signal that the economy is slowing and that margins are at the top of a 3-year cycle.”
That temporary wave of weakness that we’ve been looking for is showing up in the market. The S&P 500 just logged its worst week in four months, falling 2.2%. The Nasdaq wasn’t far behind with a 2.2% loss.
That puts the S&P 500 below levels before the Fed’s QEterninty hit the Street. It also puts stocks below levels before the European Central Bank unleashed its big monetary blast on the world. Take a look at the most recent pullback below.
That is definitely a bearish signal. The market has gotten a huge boost for a very long time from the prospect of more monetary stimulation from powerful central banks. But now that the FED and ECB have fired some of their biggest guns, the market will increasingly have to stand on its own.
And that means the economic data is coming back into focus.
That conversation starts with Q3 earnings season. For the first time in three years analysts are calling for earnings to contract. Earnings are still good in general, but it is a signal that the economy is slowing and that margins are at the top of a 3-year cycle. Those are never good things for stocks.
Beyond earnings. Europe is a total mess. Just more of the same, countries making promises they can’t keep, missing budget targets and drowning in debt.
China also continues to show major signs of weakness. This has to be the biggest wildcard in the mix. China is doing everything it can to support its economy and mask a slowdown. But synthetic stimulation isn’t sustainable. That’s the same problem every other country is dealing with right now.
Domestically, the presidential race has tightened up in the last week, so that has added a dash of uncertainty. And then you’ve got this fiscal cliff issue, which is easily the biggest short-term threat.
So as you can see, there is plenty to worry about. But even though that’s been the story for the last few years, the key difference now is the central banks have used a lot of their best moves. And with that major tailwind gone or increasingly diminished, the stage is set for more of a pullback. There’s just not a lot of things for the market to get real excited about right now.
For long-term investors any weakness is just another chance to buy. Or it could be an opportunity to look at asset allocation, your breakdown between stocks and bonds. If you think you see a turn in the market you can use it as a catalyst to make longer term adjustments to your portfolio. Stocks have spent a lot more time going up than going down over the last 100 years, so the longer you invest the better chances you have of success. Which is just another way of saying don’t sweat short-term volatility too much. Because the real gains come in the long run
Apple, Inc. (APPL) has stayed in the news as shares continue to slide, now down 10% from the recent high just above $700. As you can see in the chart below, Apple doesn’t really pull back very much. But also keep in mind, shares have been smokin’ hot in 2012, so there are some quick and easy gains on the table that a lot of big players will want to book profits on going into the end of the year. So that’s a technical outlook. Fundamentally, I think any pullback right here is a chance to buy. Apple still doesn’t look over valued at these levels, especially after the pullback. And it’s very important to remember that we are moving into the holidays, which is always Apple’s best quarter and they will be selling tons of their gadgets. Also throw into that holiday mix he iPhone 5, which is selling great, and the iPad mini, which is going to be flying off the shelves. I think Apple could eventually be worth $1 trillion, so with shares at $630, I see 50% up side to $1,000 from here.
Google Corp. was also down on the week, but bigger picture there are some interesting things going on with this stock. Shares have been ripping higher for the last four months, jumping from $570 to $750. That pushed Google out of a multi-year range and into a new all-time high. You can see the recent jump higher and new high in the chart below. So technically shares look a little over extended. But when it comes to earnings and valuation, Google is still rockin’ it pretty hard. The company is supposed to make $36/share this year, which means the company’s forward P/E is just 21 times. That’s a solid discount to the 10-year average of 27 times and not even that far off from the low of 15 times. I know that lower valuation is also a reflection of a company moving past its peak growth cycle, but bigger picture this is still a hugely profitable and innovative company. Those are the kind of companies and stocks I like to own. So if you like Google maybe you look for a little pullback to get in.
That’s all for this week, but until next time, here is a follow up article on the fiscal cliff, and how various financial leaders are calling for a resolution. And rooting for more spending of course. Enjoy!
Your Investment Partner,
Michael Vodicka is the president and founder of the Vodicka Group, Inc., a Registered Investment Advisor (RIA). He specialized in trading fixed-income derivatives at the Chicago Board of Trade before spending five years managing equity portfolios for a private investment research company.
Michael graduated from the University of Kansas with a degree in business communications and is registered with the State of Illinois and the SEC (Securities and Exchange Commission) as a Licensed Investment Advisor (Series 65).