The Lindsey Report October 2012

Lindsey Image 1Article by, Cleaton Lindsey

As of the writing of this letter (it must be reviewed before it can be sent to you), the election has yet to take place.  In the near term, the election’s outcome would be expected to influence the equity markets (as measured by the S&P 500).  They will likely over react in either case

In the month of October leading up to the election, equities retreated about 3.5% from their highs.  Some of this decline is likely attributable to concerns over the potential make-up of our leadership and how they might handle the impending “fiscal cliff”, among other issues.  However, the fundamentals of the economy are also playing an important role.

As previously noted, equity prices should reflect the health and profitability of the companies they represent; however, with the economy trudging along, maintaining healthy profits becomes increasingly difficult.

The USA Today recently published an article, “Corporate profits give investors little to cheer”.     They noted that 275 of the S&P 500 companies have reported third-quarter results. It makes reference that the “bar” for earnings estimates had been set pretty low, due to the sluggish economy and the growth seen over the past few years in corporate profits.  Therefore, some optimism existed that earnings might look good in comparison to a low threshold.

Thus far, about an average number of companies have beat estimates (62%): good, but nothing to write home about.  The more concerning element is top line earnings growth (this compares earnings growth for the same time period year-over-year).  Thus far, for Q3 2012, it was 1.1% growth.  Compare these figures to Q3 2011 (+17.3%) and Q3 2010 (+36.6%).  The good news is that there was growth, which helps support current valuations.  However, we need to see a stronger economy and stronger profit growth to reasonably expect prices to move higher.

With equity prices still near multi-year highs, now may be a good time to consider reviewing your portfolio and performing any appropriate re-balancing.  Please call if you have questions.

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