Stock prices are determined
by corporate earnings
over the long term. With
U.S. economic conditions
on the threshold of recession,
projected earnings gains
are poor and expectations
are diminishing. Stock
prices and valuation
multiples contracted
during the quarter on
the pessimistic outlook
and earnings disappointments.
Much of the gloominess
stems from a massive
credit market collapse,
but underlying concerns
also include inflation,
bearish momentum and
a dynamic geopolitical
environment. The exact
moment of improvement
is unknown, but it may
occur as soon as the
third quarter.
The bottom line on first
quarter performance is
this: the just completed
period was the worst
in more than five years
with many stock market
measures down in double
digits. Having just New
Year's Day to pause and
celebrate an above average
2007, January's first
day of trading quickly
placed investors in a
year-to-date deficit.
The Dow Jones Industrial
Average finished the
quarter down 7.6 percent.
The Standard & Poor's
500 dropped 9.5 percent
and the Nasdaq Composite
declined 14.1 percent.
After three quarters
of large-cap leadership,
big companies lost nearly
as much as mid- and small-
sized companies, according
to the Russell indices.
Value stock indices markedly
beat growth benchmarks
but also suffered significant
losses.
Economic data indicated
challenging conditions
over the last few months.
Payrolls declined in
January and February;
negative retail sales
were reported in two
of the last three months;
and in its latest projection,
the Federal Reserve predicts
reduced GDP growth for
this year. Expectations
are limited to very slow
growth in the first quarter
and a decline in the
second quarter, but we
believe economic expansion
will resume thereafter.
Although diminished in
real terms, personal
income continues to rise
and the weak dollar is
giving exports a lift.
The corporate earnings
downturn is expected
to already have passed,
with 2007 being seen
as the worst for calendar
year-over- year comparisons.
In a mirror performance
to 2007, this year should
see subsequent economic
reacceleration after
a rough first two quarters.
The Fed recently called
inflation "elevated" and
we most certainly agree.
The February consumer
price index rose 4.0
percent, but core increases
were better contained.
The hope is price increases
will moderate. Indeed,
pressures should lessen
with slower domestic
growth and abroad. Outlooks
for growth in major economies,
such as Japan, the U.K.
and the E.U., have contracted,
leaving emerging countries
as the final pillar of
global growth. We presume
slower growth will translate
into lower demand for
products, leading to
greater supply and eventually
lower commodity prices.
Historically, prices
have not faired well
during worldwide slowdowns,
particularly metals and
beverages. Bearish market
sentiment will improve
as a bottom is formed
and gains are realized.
Investors will refocus
on the long-term economic
outlook and earnings
growth.
Interest rates are low
and valuation multiples
are attractive. In the
near term, uncertainty
regarding potentially
lower profits will cap
any rallies. As comfort
in future earnings rises,
investors will bid up
stock prices quickly.
We believe the markets
may still be facing some
volatile times in the
short term, but expect
the forecast and price
to improve as we close
out the next quarter
and anticipate much better
earnings comparisons.Please
click here for investment
risk disclosure statement.
|
