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Dollars and Sense: Revenues low, but stocks keep climbing

Money

Earnings post-mortem. We’ve been talking about earnings season for a couple of weeks. It’s finally time to do a post-mortem on the third quarter, and the autopsy results are mixed. According to Thomson Reuters, almost 70 percent of companies met or beat earnings expectations. That’s above the historical average. But only 53 percent beat revenue forecasts, and that doesn’t bode well for the future. 

And yet… Despite these mixed earnings reports, the stock markets just keep climbing. The Dow Jones Industrial Average set another new record this week despite the fact that the current quarter’s earnings reports don’t support these stock prices. Right now, the price of stocks compared to earnings, what’s called the price-to-earnings ratio, is above 19. The historical average is about 15, so by that measure, stocks are overvalued by more than 25 percent. 

Some good news. The Institute for Supply Management said its service sector index rose in October despite the government’s partial shutdown. And we saw an upward revision in the Gross Domestic Product (GDP) number. But that GDP number for October—2.8 percent—may be less than meets the eye. Stuart Hoffman of PNC Financial Services said the increased economic activity was mostly due to retailers and wholesalers building up their inventories for Christmas.

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Employment ennui. And the employment picture continues to go nowhere. Today we got October’s numbers. The economy created about 200,000 new jobs, but that wasn’t enough to move the unemployment number, or even enough to get us back to pre-recession employment levels any time soon. The unemployment rate remained stuck at 7.3 percent. The number of long-term unemployed, those unemployed for more than 27 weeks, remains stuck at more than 4 million.

There’s always Twitter. Twitter went public this week. The IPO included 70 million shares priced at $26 a share. By the end of the day on Thursday, the price had soared to about $45 per share. That price made a couple of new billionaires and lots of new millionaires. The good news for the rest of us is that the Twitter IPO seems to indicate the IPO market is slowly returning to normal.  Of course, it will be a new kind of normal. In the late 1990s we sometimes saw an IPO a day. After the tech bust in 2000, we would go weeks, even a month or more, without a single IPO. The year 2012 saw an increase in IPOs, and the accounting and consulting firm BDO expects another increase this year. We’ll never be back to the go-go days of the tech boom, but things are returning to historical average, and that’s good for the economy overall.

The week ahead. With earnings season over, and no major announcements expected this week, it could be pretty quiet. It usually takes bad news to reverse a bull market, and, historically, when the markets are up, they don’t usually give back their gains in the last two months. So I’m expecting, or hoping anyway, for a pretty quiet week. I’m also prepared to be wrong.

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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