Daily Dispatches
A customer leaves a J.C. Penney store in New York.
Associated Press/Photo by Mark Lennihan, File
A customer leaves a J.C. Penney store in New York.

Dollars and Sense: Earnings season and Washington hi-jinks

Money

Earnings season. We’re into another earnings season. Stocks had been drifting downward for the first two weeks of the year, driven partly by a lack of earnings data. Stock prices ran up last year and that elevated the price-to-earnings ratio to a level above historical averages. That means something—eventually—has to give. Either stock prices will have to come down or earnings will have to go up. So what’s it going to be? It’s still a bit early, but so far earnings look good enough to prevent any serious alterations. Some early reports from bellwethers JP Morgan Chase and Merck look pretty good. Chip maker Intel disappointed, but lots of analysts think that’s because the PC market, where it’s strong, is giving way to the mobile market, where it’s not strong. So the problems at Intel are not (necessarily) indicative of economic weakness generally, but of weakness at Intel in particular and accelerated growth in mobile technologies.

Retail shifts. We’re seeing a similar trend in retail. At first glance, retail numbers don’t look that great. J.C. Penney—which has been in trouble for years—announced more store closings this week: 33 stores with more than 2,000 jobs lost. Once again, the troubles at brick-and-mortar retailers like Penney and Best Buy, which also announced poor holiday sales, is more an indication of the shift to online retailing, rather than a collapse of the retail sector generally. The Internet—and a decade of income stagnation—is forcing retailing to become more efficient as consumers become more internet-savvy and more cost-conscious.

Congressional antics. I was in Washington this week, doing interviews for my new radio program Listening In. So I got a front-row seat at the circus. The bill to extend unemployment benefits and the budget bill formed two congressional circus rings this week. The unemployment benefits extension did not pass. I talked about that bill pretty extensively last week, and as you know I thought an extension was a bad idea. Congress agreed.

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Spending bill. The other legislation, the so-called Omnibus Spending Bill, was worth about $1.1 trillion. It did pass and will fund the government through September. Some conservatives think the bill didn’t go far enough in cutting spending. Sen. Tom Coburn, R-Okla., said, “We’re just digging the hole deeper.” Rep. James Lankford, R-Okla., who is fifth on the leadership depth chart among the House GOP and is a possible replacement for the retiring Coburn, voted against the bill. He was the only Republican in House leadership to do so. Lankford said that put him in an awkward spot with the rest of the GOP leadership, but he agreed with Coburn that the spending cuts did not go far enough. Nearly 70 members of congress, mostly Tea Party conservatives, voted against the bill. But it didn’t raise taxes, it did produce some spending cuts, and it eliminated uncertainty about the operations of government, at least until September. So most people call it a net positive.

The week ahead. It’s kind of a slow week for government reports. We’ll get December home sales numbers, and the leading economic indicators for December. But those reports don’t move the markets even in normal times, and I think with earnings season going full bore, they’ll be even less influential than normal. So the real question is, what should we look for from earnings reports? We should of course be looking at fourth quarter and year-end performance, but I think lots of analysts will be watching future guidance. For the past year, stocks have hit their earnings targets pretty consistently, while revenue numbers have been soft. If we start to see more firmness in the revenue numbers, and if it looks like revenue growth will continue, then I think a lot of analysts will decide the markets are not overvalued. I doubt that will happen, but if we start to see weakness in these areas, watch out. That could bring an end to this bull market.

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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