Nearly one-third of S&P 500 corporations have reported earnings and revenue from the third quarter. With 147 companies chiming in, profits are down -0.6% and sales are down -2.7% from a year earlier.
One might have thought that several quarters of contraction in earnings and revenue (a.k.a. an “earnings recession” and a “revenue recession”) might have weakened stocks. After all, if robust sales and hearty profits are the primary drivers behind price appreciation for companies in the Dow and the S&P 500, shouldn’t diminishing sales and dwindling profits lead to price drops for the Dow and S&P 500?
Welcome to the mixed-up world of centralized bank planning.
For example, at a news conference today (10/22/2015), the president of the European Central Bank (ECB) underscored the downside risks to the euro-zone economy. Mario Draghi emphasized everything from the impact of China’s slowdown to the rapid-fire fall in commodity demand. His prescription? More central bank stimulus up-and-above the ECB’s existing bond-buying program and negative interest rate policy. On the news, developed world benchmarks (e.g., Dow, S&P 500, Stoxx Europe 600) surged by more than 1% across the board.
Did it matter that Caterpillar (CAT) discussed its expectation for 2016 revenue to collapse by 5% across all of its segments (i.e., transportation, construction, resources)? Nope. Did investors fret 3M’s (MMM) intention to reduce its global workforce by 1500 positions on dismal earnings? Hardly. Investors have come to expect huge rewards for taking risk when central planners engage in extraordinary levels of borrowing cost manipulation.
Perhaps ironically, weakness in multinational earnings and revenue simply confirms weakness in the global economy. Indeed, the weaker the results, the greater the likelihood that the ECB will step up itsstimulus measures and the greater the probability that the U.S. Federal Reserve will leave 0% lending rates intact.
Bad news is good news yet again.
Just how powerful is the combination of quantitative easing (QE), zero percent rate policy and even negative percent rate policy? Omnipotent.
Take a look at the performance of Vanguard Total Stock Market (VTI) as it relates to the creation of electronic dollar credits for the purpose of buying debt, or QE. Specifically, in mid-December of 2012, the U.S. Federal Reserve upped its QE3 program to $85 billion per month in the acquisition of U.S. treasuries and mortgage-backed securities. The program began winding down in 2014 during the “Great Taper,” though the final day of the last asset purchase actually occurred in mid-December of 2014. The 2-year performance for VTI? Approximately 52%.
Now take a look what happened from the removal of the stimulus “punch bowl” through October 21st of this year. The gains have been so paltry, an all-cash position provided a better risk-adjusted return.