Corporate earnings surprised on the positive side
· Companies’ cost-cutting measures compensated for a general decline in revenues.
o At month-end, 75 percent of S&P 500 companies had exceeded analyst expectations.
o But revenues for nonfinancial companies declined 15 percent compared with the previous year.
· Cost-cutting can only go so far; topline revenue growth must pick up to increase earnings on a sustainable basis going forward.
Employment and consumption lag
A sustainable economic recovery also requires improvements in private sector employment and personal consumption.
· Employment stats have remained negative in recent months, but the rate of decline has improved.
o In June, the U.S. lost 467,000 jobs, compared with peak job losses of 741,000 in January.
· The better-than-expected 1-percent decline in GDP was heralded as a positive, but report details revealed that personal consumption had fallen 1.2 percent.
o This figure is roughly twice as bad as had been expected.
o It indicates that household balance sheets remain under pressure, and consumers may be embracing a newfound sense of thrift.
Signs of healing
· As should be expected in the aftermath of severe global economic shock, the road to recovery will likely be uneven.
· Investors should be prepared to exercise patience—previous high-water marks may represent unrealistic goals in the short-term.
· Evidence abounds that the healing is ongoing; we are making progress on several fronts.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin.
Authored by John Blood, CFA, CFP®, chief market strategist, at Commonwealth Financial Network.
© 2009 Commonwealth Financial Network®
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