Beyond the Headlines

Ongoing PIIGS issues and the debt ceiling debate have captivated investor attention for the past several months. But as big as these stories are, they aren’t the only ones that matter for stocks. It’s frequently the little noticed or underappreciated that matters as much or more for stocks than the big headline items. In the very near term, any story can cause wild volatility. Longer term, it’s important to take a step back and get a fuller view of what may be material for stocks’ direction over the next 12 to 24 months. Here’s just a sampling of news that might easily get missed:

• Estimated earnings growth for the S&P 500 for Q2 2011 remains positive. Analysts estimate Q2 2011 earnings will log a +6.5% y/y gain. True, that’s a slowdown from the previously torrid pace of 2010, but that’s mostly due to tougher comparisons—which is characteristic of what we expected this year. All in all though, the fact is earnings are expected to grow. Early indications in earnings season have mostly topped those estimates: 29 out of 39 companies reporting thus far (or 74%) have beaten estimates. Exclude a couple Financials firms (whose problems are well known to most) and those numbers look even better. Of this early sample, 79% of companies reporting have beaten revenue estimates as well.*
• Many have fretted Chinese inflation-fighting measures will cause a hard landing. Yet all along, China’s growth has been strong—including Q2’s recently reported +9.5% y/y GDP growth—and that’s after more inflation-countering measures than we can list here.
• Brazilian domestic demand continues growing rapidly, tied to continuing rapid economic growth. Last week, Brazil reported retail sales rose in May, beating expectations. As with any nation, there are negatives to weigh as well—in Brazil’s case, that’s mostly government action with respect to the economy. But the current positive tailwinds nicely offset these negatives, plus some. Then, too, fast growth in Brazil and many other Emerging Markets is a good source of demand for multinational firms no matter where they’re domiciled.
• US GDP is at an all-time high. And while some bemoan how it got there—not quickly enough, in their view—the reality is the present expansion is moving at a faster clip than growth following 2001’s recession. It’s at a very similar pace to the early 1990s’ growth. Few complained about what followed in those expansions.
• According to Professor Mark J. Perry, the US housing market’s woes seem to be improving, “Distressed home sales are dragging down overall home prices and mask the fact that home prices in the ’non-distressed’ sector of the market are actually starting to show some healthy, positive appreciation.” The housing market has its woes and it isn’t required for the economy to continue growing, but a turnaround could be an incremental (and widely unexpected) tailwind—plus it could provide a bit of a sentiment boost.
• That data was echoed when June housing starts jumped nearly 15% from May—topping even the most optimistic analyst’s forecast. Again, it’s early to say housing’s turned—but more encouraging signs are growing.
• US and global growth continues to expand despite talk of slowdown. The IMF projects 2011 growth will be 4.3%—so while some fret country-specific soft spots, the vastly bigger world is chugging along.
• Aggregate global trade began 2011 at an all-time high. It’s increased further, and protectionist measures continue to fall all around the world. That’s fodder for additional global growth ahead.
• Positively, US exports are at an all-time high.
• Also positively, US imports are near an all-time high. (We know what many are thinking—that’s not positive! But remember—it’s total trade that matters most. If you have more questions, read this excellent articleby Dr. Donald Boudreaux on his blog, Café Hayek.)
• Although Emerging Markets inflation continues to grow, US inflation remains tame.

Ultimately, it’s fine to follow the headline items—and we don’t question the importance of that. But by focusing where everyone else is, you can frequently miss other material factors—positive and negative—that can weigh just as heavily. Remember to look beyond the headlines to get a full picture of current conditions—and to create a clearer set of reasonable expectations for what’s likely in the future.

* Source: Thomson Reuters, “This Week in Earnings,” July 15, 2011.