Jim -
On the topic of timing/recovery/etc - there was this fun with numbers from Liz Mackay last week -
There seems to be some puzzlement as to how stocks can rally as poor earnings results begin to trickle out for Q1. Yet one of the ingredients we have cited for a market low has been the ratcheting down of expectations. Analysts (bottom up) now expect negative 0.2% growth in S&P 500 earnings and a 34.6% decline in Nasdaq 100 profits for 2001. Assuming that an earnings recession is almost a certainty, we examined the 11 periods since 1950 when S&P reported earnings (trailing four-quarter) fell for two consecutive quarters. Although often with a longer lead time, the S&P 500 index bottomed, on average, 8.5 months before reported earnings momentum turned upward. Since we believe that profits momentum (four-quarter change) will rise in Q4, it therefore makes sense to us to begin to look for a market bottom according to this criteria, too. It is also not surprising that the market is beginning to firm despite bleak earnings news. Since it is now three months since the Fed took its first easing step, we revisited our study of historical market performance during these past periods. The most obvious difference is the most basic one — the markets failed to rally. The average gain for the S&P 500 three months following the first rate cut (going back to 1974) was 11.2%; instead, in 2001, the index fell 10.7%. Although it was on the downside, the smaller-cap measures again outperformed the blue chips, which is unusual in a general bear market environment, but normal when monetary policy is easier. Prior to this rate-cutting cycle, the S&P 500 had been lower after the Fed started to ease only in 1980. A little over a year ago, however, the consensus view was that the Fed could not short-circuit the new economy with its rate increases, which was true until the fourth rate hike. Now, one school of thought maintains that the Fed cannot stimulate activity because of over investment in the new economy. Monetary policy ultimately was effective last year, however, as it probably will be this year. |
