Do fundamentals matter anymore? «
Last Friday’s release of the December nonfarm payrolls report by the Bureau of Labor Statistics failed to have a significant impact on the stock market, despite the disappointing news contained in the report. Although economists had been expecting to see that 200,000 non-farm payroll jobs were added during December, the report indicated that only 74,000 jobs were added. The unemployment rate declined from 7.0% to 6.7%. On the other hand, the labor-force participation rate fell to its lowest level since 1978, declining to 62.8% from November’s 63%.
The stock market demonstrated almost no reaction to the non-farm payrolls report. The Dow Jones Industrial Average lost only 7 points to finish Friday’s trading session at 16,437 for a 0.05% dip. The S&P 500 rose 0.23% to finish at 1,842.
With the recession now over, and with the economy slowly expanding after the Fed has already initiated the taper … investors do not appear as focused on the nonfarm payrolls report as they were during the first four years after the 2008 financial crisis.
With quantitative easing being tapered away, we’re now going to find out if what is beginning to matter for the stock market is what has always mattered until the Fed found it necessary to implement its quantitative-easing program: earnings.
Those long-ignored price/earnings ratios might suddenly matter again. A recent article by hedge fund manager Whitney Tilson, concerning the absurd valuations of 3-D printing stocks — particularly that of 3-D Systems /quotes/zigman/5280737/delayed/quotes/nls/ddd DDD -0.59% sent all 3-D printing stocks on steep declines. DDD was trading at 63 times next year’s earnings estimates at the time the article was published. Some of the other 3-D printing stocks have P/E ratios which are so speculative that there is no way to compute them. When the Fed’s liquidity pump was running at full force, a stock’s price/earnings ratio didn’t matter. What mattered was missing out on a rally.
With quarterly corporate earnings back in the spotlight again — they might actually mean something this time. A lousy earnings report might actually cause a stock’s price to drop, amazing as that may seem in the never-never land of quantitative easing.
Last Thursday’s earnings miss by Alcoa /quotes/zigman/246295/delayed/quotes/nls/aa AA +0.35% after the closing bell, got earnings season off to a gloomy start, reminding investors that — going forward — those steep stock prices could result in some uncomfortable price/earnings ratios, which might cause those stock prices to actually decline. In Alcoa’s case, the stock actually sank 5.42% to $10.11 on Friday. As we have just seen, an attempt to blame the disappointing nonfarm payrolls report would be a non-starter because its impact on the stock indices was insignificant.
Thursday morning’s earnings shortfall by Family Dollar Stores /quotes/zigman/226252/delayed/quotes/nls/fdo FDO +1.16% sent the stock sinking 2.06% to $65 per share during Thursday’s trading session. Family Dollar missed the earnings consensus by only a penny — reporting quarterly earnings of 68 cents. The company’s $2.5 billion in revenue was just $10 million short of estimates. During the “glory days” of quantitative easing, such a minor shortfall may have been overlooked. In the year of the taper, it appears that investors have no stomach for weak fundamentals.
During the fourth quarter of 2013, the value of the S&P 500 jumped 9.9% from 1581.55 to 1848.66. Nevertheless, John Butters of Factset Research has reported that fourth-quarter earnings estimates — covering all 500 companies in the index — dropped 3.5%. Although that reduction is slightly lower than the four-year average estimate reduction of 3.9%, the fourth-quarter reduction is taking place against the backdrop of a 9.9% surge in the value of the S&P 500.
A Jan. 10 report from John Butters of Factset indicated that the estimated earnings growth rate for the S&P 500 as a whole during the fourth quarter is 6.1%. This represents a decline from the previous week’s estimate of 6.3% earnings growth. Back on Sept. 30, the estimated earnings-growth rate for the fourth quarter was 9.6%. For fourth quarter of 2013, 95 companies have issued negative earnings-per-share guidance and only 13 have issued positive EPS guidance.
By the end of this week, we will have seen earnings reports from such companies as Wells Fargo /quotes/zigman/239557/delayed/quotes/nls/wfc WFC 0.00% , Bank of America /quotes/zigman/190927/delayed/quotes/nls/bac BAC -0.41% , Intel /quotes/zigman/20392/delayed/quotes/nls/intc INTC -2.60% , Citigroup /quotes/zigman/5065548/delayed/quotes/nls/c C +0.08% , United Health /quotes/zigman/258846/delayed/quotes/nls/unh UNH -0.33% , General Electric /quotes/zigman/227468/delayed/quotes/nls/ge GE -0.04% and Morgan Stanley /quotes/zigman/182639/delayed/quotes/nls/ms MS +4.38% . This will be the first volley in what might be the most important earnings season in years as tapering ends and fundamentals might start to matter again. Wall Street Sector Selector remains in “ yellow flag ” status, exercising caution for the week ahead.