We approach the end of earnings reporting season in markets and the start of valuation season in class. While short-term over- and under- reaction to earnings has made the headlines, the general tone of the US equity market seems to be more about performance chasing (institutional money has to buy to keep up with the indexes, else managers lose their bonuses, and god forbid, their jobs). Earnings matter in the long-term but the Keynesian quote “in the long-term we are all dead,” has more weight than a naive person would expect.
But the longer term story is simply this. Quantitative easing has already gone farther than I had anticipated last fall. Oil and commodity prices (input costs for a whole range of corporations) are spiking in the wake of dominoes falling in Egypt, Tunisia, now Libya. Does Wisconsin count?
If companies pass these higher costs along, the already burdened US consumer stops buying. If companies don’t pass them along, profit margins shrink and investors stop buying their stocks.
One day, this will start to matter again. But times like these are not very rewarding if you are a dyed-in-the-wool value investor. Markets get into this kind of mood periodically. My handicap has always been that even though I see it coming and see it unfolding, I have trouble believing that this can keep happening. Markets learn don’t they?
On the earnings front, watch HD, WMT, Deck, CRM for consumer and momo this week.