Looking for Clues in Quarterly Earnings

The Financial World According to Inya Column,
by Inya Ivkovic, MA

Weak economic data appear simply unstoppable. The latest consumer and employment numbers made it very difficult to muster optimism about what awaits us in the second half of the year. Now investors are looking towards corporate earnings and second half of 2009 forecasts, hoping they will yield clues as to how close recovery is or whether it will remain elusive.

The reporting season opens today, and aluminum manufacturer Alcoa Inc. is the first among the 30 companies making up the Dow Jones Industrial Average, which is slated to report its financials for the second quarter of 2009. Hundreds of others will follow during the rest of July. The current month will also give a clearer picture of how the economy performed during the recent quarter and what is likely to drive it for the next six months. What everyone wants to see, of course, are continued signs of recovery. But will they get their wish?

What have been subduing the optimism lately are reports that the recession is still taking its pound of flesh out of consumers and businesses, small and large. What have struck particularly disappointing cords are two reports. One came from the Conference Board, stating that consumer confidence remained at historic lows. The other came from the Labor Department, reporting that more people lost their jobs than what was forecast.

Both reports are questioning the validity of the spring rallies, the fear being that these were simply bear rallies. I wrote about the same concern in one of my previous PROFIT CONFIDENTIAL articles. For example, during the second quarter, the Standard & Poor’s 500 Index gained 40% over its 12-year lows. But, as I feared, this performance appears to have been driven solely by the lack of worse-than-expected news, as opposed to being driven by the actual good news. And, if indeed the second quarter has been nothing but a three-month-long bear rally, then it is clear that recovery is not going to be happening fast, nor will it be as strong as needed.

That said, I have to say that, bear rally or not, the second quarter took me by surprise, in spite of all my doubts. All major indices posted double-digit gains, while the S&P 500, the broadest among large cap indices, had the best quarter in over a decade. It was also the first time the Dow Industrial and the S&P 500 posted quarterly gains since this whole mess started in the third quarter of 2007.

There is another important question that this quarterly reporting season is supposed to answer. Namely, there are clear signs the economy is stabilizing. But unless businesses are doing the same, it may all be for naught. The health of the economy may not translate into positive market performance. And, considering that last week the Dow, S&P 500 and NASDAQ closed down at 1.9%, 2.5% and 2.3%, respectively, most investors are already pessimistic regarding this quarterly reporting season.