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The Real Barometer of the Economy Will Be Earnings Season


Corporate earnings are a more important barometer of our economy than government labor numbers, though the two are most certainly intertwined.

The economy seems to be sputtering along – not really contracting but not really growing, either. Economic indicators have been middling, at best. The economy does not seem to be providing any incentive to corporations to invest right now. Remember the jobs number on Friday? The Bureau of Labor Statistics provided the grim news: Three straight months of job growth below 100,000 new jobs.

Most CEOs seem to be on the sidelines waiting to see the results of the election in November. Most corporate decision makers believe they will have some clarity on fiscal and tax policy after they know the make-up of the White House and Congress come November. This clarity is supposed to spur the decision makers in the board room to loosen the investment purse strings.

We'll see about that. I can tell you that in my 17 years in corporate America, I've never heard the dialogue switch to politics or elections if the investment opportunity looked attractive enough. When a good idea for a specific business popped up, we found the money and made the investment – and never thought an election would have a consequence on our chance to succeed.

I am not saying there aren't good ideas. Every company I ever worked for had a thousand new ideas for investments. Corporate America doesn't lack places to spend money and expand. But when the signals of consumption and demand look weak, it is difficult to convince yourself to make the investment. The decision makers set the bar for investment higher when consumption signals are weak.

That is where we find ourselves now. Senior decision makers at many corporations have little incentive to stick out their neck on new investments given the economic climate. The election is a good excuse to sit back and wait.

This brings me to earnings season. While the CEOs are on the sideline with their investments, they will be pressed front and center to answer about their company's earnings from last quarter. Even more importantly, they will be asked about their forward view for the industry in which they compete. In the end, corporate earnings are a more important barometer of our economy than government labor numbers, though the two are most certainly intertwined.

Earnings season starts this week and will last roughly four weeks. It will really reach a fevered pitch by the last week of July. By then, we should have a very good feel for the results from Q2 and the forward view from the Chief Executive suite.

The last quarter actually saw very solid earnings. The number of firms in the S&P 500 that beat expectations was near a recent high. Maybe the bar was set too low given some of the worldwide economic contraction in 2011. But the firms beat anyway – and they also continued to add to the cash hoards on the balance sheets. The growing cash balance in corporate America is a continuing bad sign for economic expansion – at least in the short-term.

At my firm, we will be surprised if earnings look as attractive this quarter – but we are optimistic. We just expect the normal percentage of companies to surprise to the upside and wouldn't be shocked if that number came in a little low. More importantly, we expect the CEO suite to provide foggy guidance going forward. Mostly, we think this because we believe the view from the C-suite is actually foggy! The mixed economic indicators will likely show up in earnings also.

One way or the other, we'll track the trends and see what's in the actual numbers by sector, but expect continued lukewarm results. And since hedging is an all-weather approach, this suits us just fine.

Editor's Note: For more from Wayne Ferbert, go to Buy & Hedge ETF Strategies.
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No positions in stocks mentioned.
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