October 14, 2012
Consumers are more cheerful than at any time since before the economic crisis, yet business executives and the International Monetary Fund are wary.
The contrasts in last week's economic and corporate data were stark. The consumer confidence numbers from the Thomson Reuters/University of Michigan survey Friday hit the highest point since September 2007. Yet, in a gloomy report, the International Monetary Fund warned earlier in the week that Europe's financial troubles and recession are weighing on the world, depriving a wide swath of the globe export opportunities, and even pulling at once powerful China and the rest of Asia.
If Europe and the U.S. don't get their economies on a better track soon, the IMF warned, the global economy could go back into a recession. As it is, the IMF is forecasting only 3.3 percent growth this year after lowering estimates two previous times in the last few months.
Meanwhile, corporate profits, reported during the first week of earnings season, confirmed concerns as executives talked about tough conditions in international markets. Companies maneuvered through difficulties earlier this year and made wary analysts look like they were crying wolf as they predicted a profit slowdown. But as companies go into the second week of earnings reporting season Monday, it's starting to look like companies are facing more difficult strains.
Companies as varied as Caterpillar and Intel have lowered expectations. And despite the fact that analysts have been lowering earnings estimates for weeks, Thomson Reuters reported an even deeper dip in estimates as the week came to an end. The consensus among analysts is that earnings will be down 3 percent for the quarter that just ended, compared with the same period in 2011. That's a major change, and the first time since the financial crisis that earnings could be on the decline.
So far in this earnings season, 56 percent of companies have reported profits above expectations, but the long-term average has been 62 percent. Only 50 percent were able to produce revenues above expectations; again far below the 62 percent average and even below the 55 percent of the past four quarters, said Thomson Reuters.
Investors often buy stocks when many are exceeding expectations, but they grow uncomfortable and sell if profits are lower than anticipated. Stocks fell most of last week, although the Dow eked out a slight gain on Friday. The Standard & Poor's 500 lost 2.2 percent for the week and closed at 1428.59.
Perhaps most unnerving recently, 94 companies cautioned investors, prior to their official announcements, that expectations needed to come down, said Thomson Reuters. That's the weakest since the third quarter of 2001, when the stock market was falling amid the popping technology stock bubble.
European markets were also on edge last week, as Spain delayed seeking financial help from the rest of the eurozone.
In the U.S., debt issues lie ahead. But that remains a threat that most investors assume will somehow be resolved.
Meanwhile, "consumers are seeing the bright side of things," said Leslie Levesque, economist for IHS Global Insight. Consumer confidence numbers have been climbing for two months and are at the highest level since the recession, and Levesque is anticipating another month of improvement.
Confidence and action don't always go hand in hand, but this week's retail sales report will be watched closely for signs that consumers are feeling good enough to spend.