Take Note Of The Differences

We had scares the past two Summers that turned out to be buying opportunities. The reason being that corporate earnings were largely unaffected by these scares. This year we are starting to see a slowdown in corporate earnings. A big decline in corporate earnings would have  a lot more teeth than an oil spill or news out of Greece.

Valuations are not high so a slowdown in earnings is unlikely to effect the market too badly. I would not be surprised to see the market rise in the face of an earnings slowdown as valuations are on the low side. It would likely take a large drop in earnings for us to see a big reaction from the market. I believe it is unlikely that we see a large drop in earnings because there are so few excesses in the economy and the corporate world.

In the past 30 years there were two large corporate earnings declines, the recession following the tech bubble and the recession following the real estate bubble. In both cases there were many excesses in the economy and at corporations. A clearing of those excesses is what led to the large decline in earnings. I do not see anything comparable today in the corporate world or the economy at large. I am not saying that a large corporate earnings decline cannot happen. I only want to point out some of the differences as everybody is already familiar with the bear case.

In the shorter term a nasty day like yesterday typically leads to some sort of a rebound, which we are seeing this morning. We are still a long way away from being short term oversold (July 3) so its possible that after the rebound we see a retest of yesterday's lows or even lower lows. I remain of the belief that the downside will be limited as the intermediate term indicators are still pointing up. With that said, the closer we get to the oversold reading the safer it would be to buy.

No comments: