A number of big companies are showing disappointing earnings, from the tech sector (YHOO, EBAY) to the banking sector (MS, USB). Some of these companies cut costs to deliver in-line or better-than-expected earnings per share (EPS) figures, which has helped the S&P 500 from crashing as hard as gold famously did at the beginning of this week. Still, SPY is down nearly a percent for the week and is quickly losing the double-digit growth it steadily earned in the first quarter of 2013.
So what is next?
Sell in May and Go Away?
This earnings season has been important for one main reason. Expectations at the beginning of 2013 that this, finally, was the year of real economic recovery in the United States drove large-cap stocks to pre-crash levels. We’ve seen this movie before; here at Zolio, we’ve looked closely at how investor expectations in early 2013 tracked closely the momentum in 2012 and 2011, but we’ve also seen different fundamental drivers that suggest 2013’s overall market movements will not fully track what we have seen in years past. Several analysts have seen a similar divergence.
However, these disappointing revenue results suggest that the market’s recovery this year is not fully at the breakthrough point, and a “sell in May and go away” strategy may, in fact, pan out. This is leaving top-down analysts consider an investment strategy that times the market to augment returns, while bottom-up analysts are finding analyst expectations hurting their fundamental strategy, despite its logical soundness.
Hopes for Macro Momentum
The tide can change if a few encouraging trends continue. Japan has begun an aggressive and historically unprecedented strategy of quantitative easing, essentially embracing Keynesian economics and rejecting the austerity leads to growth trend that has caused double and triple-dip recessions in Europe. WisdomTree’s hedged Japan equity fund (DXJ) is up over 24% YTD, the kind of result that no investor in Japan would have dreamed over for the past fifteen years.
Then there are questions of capital flows changing tide away from emerging markets and Europe and towards America. With Cyprus’s banking collapse and fear that European banks are unsafe, high net worth individuals may flow assets into the U.S. market where the FDIC has re-affirmed its insurance on deposits throughout the crisis. Add on top of that the slowdown in China, slowing growth throughout mainland Asia, and global low inflation, deflation, or anemic risk-adjusted yields on fixed-income products, and you have the perfect conditions for the ultra-wealthy to bring their wealth to American companies.
Investor Responses
Betting on a capital inflow will not be enough in a market where top-line growth is often negative. Rather, investors will need to heighten their bottom-up investing chops and find the most attractively priced equities in the most protected or resilient markets, and bet accordingly. Passive investing is being challenged by an increasingly difficult and complex investing world, spurring investors to be choosier in their bets and more confident in their convictions.