Everyone knows by now that the Fed lowered rates in a surprise cut yesterday of 75 basis points before the markets opened. This is certainly a good start and shows that the Fed isn’t asleep at the wheel, which was the impression they gave at last week’s Congressional testimony. The markets have declined steeply from their highs and are now approaching the 20% correction level necessary to deem this a bear market.
Earnings results are starting to flow in and in all reality don’t give the impression that our economy is in a recession. Sure, the reactions of many stock prices to earnings news makes it feel that way, but the results themselves do not necessarily paint the same picture.
Apple’s results actually crushed estimates last night even though some in the media are portraying it as a miss. Sure, their guidance was lowered, but their reported results were just fabulous. That’s what often happens in bear markets; the uncertainty breeds multiple contraction or a decline in the value that investors are willing to pay for a given dollar of earnings. In looking at Apple’s earnings more deeply, it becomes apparent that their Mac platform is driving huge amounts of upside for the company, proving that the I pod Halo effect is beginning to bear fruit. It is also important to recognize that Apple has repeatedly lowered guidance following earnings results in the past, including on more than a few occasions in the last couple years. The approach to guidance is nothing new for this smart and innovative company.
On a macroeconomic perspective, while earnings results aren’t showing signs of a recession, they are clearly showing signs of a slowdown. Based on results so far, fourth quarter 2007 profit growth is expected to be down 19.6% year over year, a remarkable tumble from the positive third quarter levels. Even more striking, however, is the figure excluding the beleaguered financial services industry. On this basis, fourth quarter 2007 profit growth is actually projected to be up a solid 11.4% year over year. The only other negative sector is materials.
In spite of all the negative action in the markets, we’re still not willing to call this a recession. The evidence suggests that the center of the storm still resides within the financial services sector, where loan losses continue to mount and unscrupulous behaviors continue to surface. While the consumer discretionary sector has also shared a similar decline in value, results from companies like Coach this morning suggest that the magnitude of difficulties are nowhere nearly as high for this sector as they are for the financial services complex.
In closing, I found this quote this morning in an article published by the Akron Beacon Journal. The excerpt reads,
”U.S. stocks plunged in trading Tuesday, wiping out about $600 billion in market value and erasing all of 2007′s gains, after a sell-off in China spread and sparked the biggest rout in four years. Treasury bonds saw the biggest jump since December 2004. The Dow Jones Industrial Average fell as much as 546 points, the most since the first trading day after the Sept. 11, 2001, terrorist attacks. All but two companies in the Standard & Poor’s 500 Index (Akron Beacon Journal (OH), 546 words.)
You may not have even noticed it, but this was a quotation about the market’s plunge about the same time last year! Remarkable, isn’t it? Sure, things aren’t the same as they were last year, but it’s comforting to know that the more things change, the more they stay the same. Or as very wise many once said, ”there is nothing new under the sun.”
This is just one of those periods that we have to grind on through. Regardless of whether or not we are actually in a recession, the point may be moot as the stock market has already begun to discount one. The rewards of hanging tight are never earned easily, but one day at a time, with an eye focused on the year ahead.
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