The rally we’ve experienced since March could be coming to an end especially as earnings announcements come out this week.
AOL News reports that during the second quarter, companies largely beat modest earnings expectations by cutting costs and streamlining operations. That helped fuel the market's rally throughout the summer.
Now after recent economic data, investors, analysts and Wall Street institutions are nervous whether the rally can be sustained. For example, the ISM Manufacturing Index fell to a level of 52.6 for September. The rating means that the rate of manufacturing is recovering more slowly than anticipated.
That doesn’t bode well for unemployment levels. If manufacturing isn’t picking up, then obviously hiring isn’t going to happen either. And we can see that hiring isn’t picking up by the unemployment numbers.
In fact, latest government data shows first-time jobless claims were up more than expected to 551,000. That set the tone for what is expected to be a 9.8% unemployment level.
What you have to factor in is that personal consumption expenditures account for 60% of total employment in the U.S. economy. So as unemployment heads higher, consumer spending goes down. Consumer spending in general accounts for two-thirds of U.S. economic activity.
Investors are worried that the downturn in consumer spending will show decreased earnings. As Madison.com reports from the Associated Press, “Third-quarter reports could give investors a better sense of whether companies managed to bring in more revenue to produce earnings growth or whether they again resorted to steep cost-cutting to boost their bottom lines as with the April-June period.”
If companies report better-than-expected earnings, it’s highly unlikely they will come from consumer spending. The National Retail Federation (NRD) predicts that “this year's holiday sales for the combined November-December months will decline 1% to $437.6 billion.”
What does all this mean? Zachary Scheidt of Taipan’s New Growth Investor tells readers, “It’s time to batten down the hatches. Stocks have been bought hand over fist this summer in anticipation of a true economic rebound. Now it appears that the market has run too far, too fast and prices are a bit too optimistic compared to reality.”
Zach recommends investors have a strategy for surviving and prospering in what could be a very ugly fourth quarter.
Zach explains, “At New Growth Investor, we have been concentrating on a stable group of investments that should stand up well even in difficult economic circumstances. Over the past several months we have avoided speculative names and have built a portfolio of resource-rich, recession-resistant growth stocks and I expect them to hold their own.”
Zach tells readers there will be a time in the next year or two to pick up very speculative names on the cheap, but for now he’s asking readers to stick with a more fundamentally sound approach.
You can learn more about Zachary Scheidt and New Growth Investor right here.
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