A Fresh Thought about September
At "A Dash" we are always trying to highlight good ideas from great sources. Today we got a research note with a fresh thought.
But first, a mini-quiz. What is the next number in this series:
-5.3, -8.2, -11.0, -1.2, 0, 0, 2.5, 3.6, -9.0, …….?
Can you make an inference from this series? Imagine that it is a question on the SAT!
The Fresh Idea
Has anyone notice the dog not barking in the night? JP Morgan Research did as follows:
Current NEGATIVE Preannouncements for 3Q at lowest level since
1997 and, historically, Negative Preannouncements inversely correlated to
September stock returns . . . As we noted in our earlier commentary, one
reason for the skittishness of stocks in September is the specter of negative
preannouncements. Since 1995, the absolute level of negative preannouncements
in 3Q (September quarter) is inversely related to performance of September
(S&P 500). For 2009, NEGATIVE preannouncements are running at 259 – only 3
periods when NEGATIVE pre-announcements were the same or lower. In each of
those years, the returns were positive, averaging 4.9%. As shown in Figure 7,
this implies that the likelihood is higher for a positive September.
You need a relationship with JP Morgan for the full report, which is quite interesting.
Many observers disparaged the good earnings from the second quarter as the result of cost cutting without revenue growth. The market took a different view. The observation about earnings potential is reasonable, but it raises some questions. What more could companies do? With lower costs, they are poised for improving earnings if and when revenue increases. Do the skeptics see any winning scenario?
Stock market investors should beware of confusing their ideas about politics and the economy with corporate profits.
As investors, we are buying the earnings and/or cash flows of companies, not GDP futures.
The Mini-Quiz Answer
The series in the question represents the monthly September returns of the S&P 500 for this decade. Do you want to make an investment decision based upon your guess? We do not, as we described in this article about the September theory.
Our Take
A relatively modest economic rebound can fuel solid earnings growth.
Good points, as usual!
>> “With lower costs, they are poised for improving earnings if and when revenue increases.”
–The IF and WHEN part may present the problem. An analogy might be if someone created a more efficient catch-basin, during a time of drought. If the rains do not come, or don’t come within the discounting period, the enhanced potential-efficiency will not actualize.
The pessimistic argument, as I understand it, is that this is not a typical inventory overstock recessionary cycle, but a multi-factorial deleveraging phase spanning years rather than months.
I’m not a fundamentalist, and therefore have earned no right to an opinion on this myself, but it seems to be the most cogent bearish argument extent, for why normal ‘recovery’ metrics are not applicable in this case.
Great piece Jeff! I like it when you mentioned: As investors, we are buying the earnings and/or cash flows of companies, not GDP futures.
I believe that markets can continue to perform well on a rebound in S&P 500 earnings even if the US economy recovers with a whimper. 45% of S&P 500 earnings are now tied to the global economy (including indirect effects of commodity prices on revenues… I believe emerging markets secular demand as well as weakness in dollar will continue to drive prices up!)
Good work Jeff! Only one basic question: from whence will come the growth in earnings? We have the consumer deleveraging his balance sheet and crawling under large rocks, we have continuing net job loss (the talking heads spin increased productivity with fewer workers. Well, fewer workers mean fewer consumers). Only “growth” area I see is in government! I do not ask for much, just show me ONE solid area of economic growth. All of this fundamental stuff is for the birds as a short term trader and I do not even think about it on a day-to-day basis, I just trade price. However, could be hell to pay in the long run. Fundamentals do have a way of catching up to price.