Stocks got carried away about the recovery.
That at least is one interpretation of two curious market moves so far this earnings season. Intel Corp. blew away expectations Thursday. Ditto for JPMorgan Chase & Co. the next day.
And how did investors show their gratitude? They sold stocks by the bucketful. Intel was off 3 percent on Friday, and JPMorgan down 2 percent. The Dow Jones industrial average fell almost 101 points.
"The market may have gotten ahead of the underlying economy," says CreditSights analyst David Hendler, by way of explanation. JPMorgan's report showed that "loan demand is still contracting," which means a full recovery is still a ways off.
The weak outlook may have caught Wall Streeters by surprise, but here's the bigger shocker: that they were surprised at all.
The weak recovery is news?
Stock prices reflect the future, not the present. But with unemployment at 10 percent, people with jobs scared they may soon add to that grim statistic and a quarter of Americans owing more on their mortgages than their homes are worth, just what kind of future were the professional traders responsible for this 10-month old rally expecting?
The answer from late last week about their view: too optimistic.
JPMorgan reported earnings per share last quarter of 74 cents, a fifth higher than analysts expected, according to Thomson Reuters. The company made money off investment banking, including financing stock and debt offerings, but lost hundreds of millions in consumer loans.
That rattled investors. They're worried consumers could dampen profits for a while yet.
CEO Jamie Dimon, for one, wasn't reassuring on that score. "We don't know when the recovery is," he said in a conference call with analysts.
The bank said losses on credit card and other loans could still climb and that it will need to bolster reserves. Add to that the proposed new taxes on banks by the Obama Administration and a hostile regulatory climate, and investors decided to unload.
Of course, it's early in the earnings season and sentiment about the recovery could change fast.
Bulls are hoping a flurry of reports in the coming week will show consumers are opening their wallets again.
Did average spending per visit to Starbucks Corp., which reports on Wednesday, rise last quarter as it did in the third? Or are Venti Cinnamon Dolce Lattes getting replaced with a plain Cup of Joe?
Was Kimberly-Clark Corp., reporting on Friday, able to fend off cheap generics in the diaper and tissue wars? Is Harley-Davidson, reporting the same day, selling more $25,299 Fat Bob bikes?
Then there are all those woebegone banks, which traded off sharply on Friday. Credit card giant
Citigroup Inc. reports on Tuesday and
Wells Fargo & Co., a big mortgage lender, the next day.
Hoping for a positive surprise? CreditSights' Hendler isn't holding his breath.
"JPMorgan is the best of the breed," but even it disappointed, he said. He predicts that banking stocks "will track sideways until the next quarter."
James W. Paulsen, chief strategist at Wells Capital Management in Minneapolis, thinks the bears were dead wrong Friday just as they've been for most of last year.
Companies cut costs as if a depression were imminent, he argues, so every extra dollar of revenue will yield outsized profits now. What's more, he says, the rising stock market has Americans feeling more wealthy so they are likely to spend more.
"The constant refrain for months has been the market is ahead of the fundamentals," Paulsen says, but it's proven to be the other way around, and the market is still trying to catch up.
His prediction: The Standard & Poor's 500 will hit 1,350 before year end, up 19 percent.
Maybe so but those Friday fraidy cats may be onto something.
One highly regarded gauge of market value, championed by Yale professor Robert Shiller, divides stock prices of companies in the S&P 500 by their 10-year average earnings to smooth out troughs and peaks due to business cycles. By that measure, the index is trading at 20 times cyclically adjusted earnings versus an average of 16 going back 128 years.
The market may rise a lot more but history suggests, and this earnings season may confirm, that's one risky bet.
