A few months ago, we discussed the mixed corporate earnings that were reported for the second quarter and what that meant for the economy. Our conclusion was that mixed earnings reports and reduced expectations for future revenue following many quarters of record profits was an indication of a possible expectation in the corporate world of future economic troubles, and that this was a trend worth watching.
We have now reached the time when companies are reporting their third quarter earnings, and unfortunately, the trend might be indicating problems in both the economy and Wall Street. Rather than mixed earnings last quarter (a mix of companies exceeding expectations and underperforming or reducing future expectations), this has been replaced by a majority of high-profile companies disappointing in comparison to those expectations.
This has significant meaning, and might be cause for concern. We are all aware that this has been a slow, drawn-out recovery from the Great Recession. While the economy has been slow to grow and create jobs, we have had the benefit of a stock market that has performed admirably in its recovery, despite ongoing problems in Europe, slowing growth in emerging markets economies, and our slow recovery here in the United States. This has largely been driven by corporate earnings and a moderate rebound in consumer spending.
Unfortunately, as corporate earnings miss expectations, it is an indicator that consumer spending might be slowing. As consumer spending slows, so does the economy. As companies reduce their projections for future revenue and profits, it suggests that they are expecting the economy to continue to be a problem and that consumers will continue to reduce their spending as well.
What does this mean for you and me? Well, the slowing economy shouldn’t be a surprise, considering that the GDP growth rate has slowed this year prior to this morning’s initial report of some additional growth. Unemployment continues to be a concern, and remains a problem that won’t be solved quickly. Where this creates uncertainty is in the markets. After great 2012 performance for the markets coming into October, we have had some significant negative days in the markets and have lost some of the gains that were earned this year as companies have reported their earnings misses. Though we currently remain solidly in positive territory on the year, this concerning trend is certainly something to watch as we head towards the end of the year.
Year-end is always a good time for investors to review their holdings and to review your strategy with your Wealth Manager or Financial Advisor to make sure you are still on the right path for 2013.