Tags: Consumer | oil | first quarter | earnings

Brace for an Ugly First Quarter

By    |   Thursday, 26 March 2015 01:32 PM

The economic picture is about to change. The narrative of a solid U.S. economy and strong corporate earnings propping up a highly valued stock market is about to fall apart.

Next month companies will start reporting first-quarter earnings. Those earnings, in the aggregate, are likely to be dismal. As well, next week will mark the end to the first quarter. GDP for the quarter promises to be lousy, perhaps astoundingly so.

The next month or two will provide the bears with much ammunition. The case will be made that current stock prices, now priced at about 18 times trailing earnings, are not justified while corporate earnings are falling and the recovery is stalled. In past years, sputtering growth was countered by an accommodative Federal Reserve. But the Fed is pulling out to leave the economy to its own devices. Soon we will be looking at a market without support of either the Fed or the economy.

But I believe such judgments will be premature and short-lived.

A confluence of negative events and circumstances has descended on this particular quarter at the same time. First, there's the energy disaster. Crude oil prices crashed 60 percent between last summer and early this month. Companies in the energy sector, which make up more than 10 percent of the S&P 500, will endure plummeting earnings this quarter, pulling down the overall earnings picture.

Then there's the soaring dollar. The U.S. Dollar index has surged 25 percent in just a few quarters. That's not only a huge gain for the index, but the sheer speed of the greenback's rise has not been seen in many decades. The sudden and severe currency swing is killing companies that sell products overseas.

Earnings are hurt when revenues earned in foreign currencies are converted to dollars, and also by the fact that rising prices for U.S. goods makes them less competitive and sales volumes decrease. A recent estimate is forecasting that companies in the S&P 500 that earn at least 50 percent of revenue overseas will collectively see first-quarter earnings plunge more than 10 percent.

But there is still more to this first quarter stew. Throw in a longer and colder than normal winter, like last year, and the West Coast port strike and it all adds up to terrible earnings and a bad GDP number.

But here's the thing. Low oil prices and a strong dollar have both negative and positive repercussions for earnings and the economy. The negative repercussions are felt immediately, while the positive aspects take a little longer to filter through. This quarter will reflect almost all downside for the movement of oil and the dollar. But the positive aspects will come through in future quarters.

Lower gas prices put more money in the pockets of consumers, like a tax cut. The lower oil and commodity prices also reduce costs for businesses. The strong dollar as well will result in lower input costs for manufactures, as commodity prices and anything purchased overseas are cheaper. In short, the falling cost side of the equation will offset much of the earnings damage endured this quarter.

There's also the consumer. Consumption accounts for approximately 70 percent of GDP and the U.S. consumer is poised to have a great rest of the year. Not only are lower gas prices putting money in consumers' pockets, but wages are finally growing in a meaningful way. As well, recent consumer confidence numbers are the best since before the financial crisis.

I believe the solid economy and the bull market will endure. But it might not be looking too good after the first-quarter numbers hit. As a result, the market could experience a correction of 10 percent or more. But such a sell off will be a buying opportunity ahead of improving circumstances in future quarters.

About the Author: Tom Hutchinson
Tom Hutchinson is a member of the Newsmax Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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The economic picture is about to change. The narrative of a solid U.S. economy and strong corporate earnings propping up a highly valued stock market is about to fall apart.
Consumer, oil, first quarter, earnings
Thursday, 26 March 2015 01:32 PM
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