If There’s No Growth, Why Are These Stocks Going Up?

If There’s No Growth, Why Are These Stocks Going Up?The stock market is doing amazingly well moving higher in value in anticipation of new monetary stimulus. The Dow Jones Industrial Average and the other main stock market indices will probably tick higher until third-quarter earnings season begins, when we could see a lot of corporations “outperforming” with flat earnings.

Expectations for this upcoming earnings season have already been reduced, and the current consensus is for earnings to be about the same as last year’s third-quarter earnings. It’s very true that corporate earnings are managed, so I think we’re still going to get a lot of companies beating consensus earnings estimates, even though business isn’t really getting better.

There are so many contradictions in the stock market and the economic data right now. Statistics on the manufacturing sector are weak, yet industrial stocks like Anixter International Inc. (NYSE/AXE) and LKQ Corporation (NASDAQ/LKQ; NYSE/LKQ) are doing great (as you can see by their charts below).

Anixter Intl Inc Chart


Chart courtesy of www.StockCharts.com

LKQ Corp. Chart

Chart courtesy of www.StockCharts.com

Most individuals don’t look at corporations in terms of their financial health; consumers just want good service at a fair price. But as a stock market investor, the numbers are everything and a company’s earnings growth and balance sheet really matter. Larger American corporations have done an excellent job maintaining their earnings through the last recession to the present, largely due to strong cost controls, which affect new employment. The big crack in the system is starting to be felt, and that’s with revenue growth, which is becoming much more difficult to achieve with the eurozone in recession and China in a major slowdown. Whether corporations can keep their earnings flat with slowing revenue growth will be evident very shortly.

Valuation is the one reason why the stock market performances of Anixter and LKQ, as examples, have been very good over the last few years. These stocks were not and are not expensively priced given their earnings, and this is a story that relates to most of the stock market. Investors have been buying because of the Federal Reserve, but also because valuations are still fair. Reasonable stock market valuations go a long way to minimizing corrections and preventing bear markets.

Making predictions about the economy and the stock market is pretty much a fool’s game these days because there is no underlying trend. In this kind of environment, bull market arguments (such as an earnings multiple expansion) have just as much merit as bear market arguments (such as the upcoming fiscal cliff). As I’ve been writing for some time now, it’s important for stock market investors to be very conservative going forward because economic growth in the world’s best economies is now very hard to come by. I don’t know what will happen to the U.S. economy, the stock market, or corporate earnings going into 2013, but I do know that an equity investor’s only friends going forward are likely to be dividends, with a little gold on the side.