Published December 04, 2012
Investors have always been worriers. However, with non-stop access to information through all multimedia channels and social media that hit us every second of the day, it is hard to distinguish what is a legitimate worry about and what is interesting but isn't important. As investors we must drill down through the headlines, through the sound bites, and gain perspective and determine the relevance to a story and how it might impact investments.
In the 26 years I have been managing money for individuals, I have been amazed and at the same time empathetic to the emotional highs and lows that occur in and around finance. I have developed as a general rule that when trying to make investment decisions about an issue, story or subject it is crucial to determine if earnings, earning forecasts, or interest rates are going to, in the short or long run, be positively or negatively impacted.
Never forget that earnings and interest rate directions have the greatest impact on valuations. Today, all the headlines are about the fiscal cliff and the coming problems related to it. This is a huge subject and needs to be of long-term concern. However, I want to direct your attention at what I think is a major news flash that came out recently that has been largely overlooked .
A just-released report showed 2012 earnings took a hit. This is important because it shows that public companies are doing worse than expected and that all businesses are slowing compared to what was originally forecast .They hit the lowest level since 2012 estimates were initiated in 2010. If the current estimates hold steady, then 2012 earnings growth will be dismal, only being 1% higher than the previous year.
Coming out of a deep recession at this point in the "recovery," earnings estimates should be significantly higher and robust. They aren't. It is true that stock prices today are still undervalued based on expected earnings growth and where interest rates are today. However, looking into the future, with all the regulations, rising prices on commodities and an overwhelming tax burden it is hard to come up with a strong case for earnings growth to pick up next year.
If we continue to see lower earnings revisions from analysts, and actual earnings estimates come in low in comparison to forecasted numbers, you should expect to see stock prices drop 10-15% in the first half of 2013.
As you watch all the drama unfold about the fiscal cliff, make sure you don't lose sight of the most important statistics, earnings and interest rates.