Technically, the United States went over the fiscal cliff on January 1, and for those of you paying attention, the S&P 500 rallied 4.57% from 12/28/2012 to 1/4/2013.* What? Not what the financial media was predicting? The good news is that Congress was able to pass the American Taxpayer Relief Act before markets opened in 2013, thereby making permanent the Bush-era tax cuts for most Americans. The bad news is that Congress kicked the can down the road two months on $109 billion in painful spending cuts. While we wait, and endure two more months of headlines about partisan bickering, we’ll get some real news about how companies are doing with the fourth quarter 2012 corporate earnings.
Corporate earnings seasons provide a report card for how companies around the world are doing. Not only do we get a backward view at business activity and profitability, but corporate managers provide forecasts about how they expect their business to perform in the future. Wall Street plays a bit of a silly game with earnings. Wall Street analysts try to guess how much companies will earn. If the analysts guess too high, stocks tend to fall; if they guess too low, stocks tend to rise. Then, there is guessing about the guessing. Money managers we are talking to think that Wall Street analysts have set the bar for corporate earnings a bit low for the fourth quarter. So while economic activity may have been hampered by the uncertainty around the fiscal cliff and a mediocre holiday selling season, Wall Street may be too pessimistic relative to how companies performed, relative to the previous quarter. In fact, we have seen many analysts significantly reduce their estimates since last October. According to Thomson Reuters data, earnings were expected to grow by 2.7%. Now, those guessing about the guessers say that these lowered expectations leave room for companies to surprise investors, even if their results aren’t particularly strong.
While corporate earnings are interesting and can sometimes provide insights into important economic trends, we don’t care all that much about any one earnings season as we are long-term investors; in general, we don’t get too caught up in the events of any three-month period. While we don’t focus that much on a single earnings season, you can expect the financial press to be buzzing. Headlines from the financial media about which companies beat and which ones missed their projected earnings make great news; but, remember, the financial press isn’t in business to give you advice. They are in business to sell advertising and generate ratings. So while the news swirls about earnings, about the budget deficit, and just about anything else, the key is to stay focused on your financial goals and maintain a consistent strategy.