- Slowing economic growth in some areas have been pointed to as sign of a looming double dip.
- Double-dip recession is a vague term lacking a technical definition, but it would seem rising profits and sales wouldn't be included in any version.
- Corporations are raking in solid profits and sales, and are sitting on mountains of cash they've only begun to deploy investing in projects designed to capture future profit growth.
- Drip after drip of strong profit and revenue reports likely erode fears of a double dip—and likely push cheap stocks higher.
(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of a broader theme we wish to highlight.)
Lately, signs of slowing growth in some areas (surprisingly to many, not Europe) are often pointed to as harbinger of a dreaded double-dip recession. (Take yesterday's Philly Fed manufacturing survey, for example.) It's true US GDP growth has cooled after an initial charge off the recession's trough, mostly because of imports which grew along with every other GDP component last quarter. But cooling growth doesn't signal renewed recession.
Before beginning double-dip preparations, it'd be helpful to define what one actually is. To wit, we note the term has no technical definition and is vague to say the least. Consider the following questions:
1. Exactly how much growth can occur between dips before they're two distinct recessions?
2. Does each dip have to have the same root cause? If not, isn't it just two different recessions?
Using the current vague definition (or lack thereof), 2007-2009 could be considered the 14th dip of the Great Depression (a decaquadruple dip)!
Unless we're grossly misinterpreting the double-dip concept, increasing sales and profits seemingly wouldn't speak to one approaching. And with 96% of S&P 500 companies reporting, Q2 blended earnings growth is a solid 38% year-over-year. Following over 30% growth in Q4 2009 and Q1 2010, this is rare and bullish—and the economically sensitive Materials and Energy sectors led, with over 90% year-over-year earnings growth each. Revenue growth for Q2 was also strong at 9% year-over-year.[i] Corporate America currently isn't showing many signs of a new recession.
Admittedly, earnings and revenue cited are for Q2—backward looking. But forward-looking consensus expectations are for growth to continue at a very healthy clip. Analysts' expectations have proven far too cautious for the last few quarters, and actual earnings results have trounced expectations—a trend likely to continue. Strong earnings and tight purse strings have resulted in corporations with massive cash balances they're only now starting to deploy to capture future revenue and profit growth—a huge tailwind for the economy and stocks.
Don't believe us? Then hear it from corporate executives themselves. Thursday, after announcing solid results, Caterpillar CEO Doug Oberhelman spoke to recession fears directly, saying, "There seems to be a doom and gloom in the punditry. We're not seeing that." Shopping center giant Westfield Group agrees—Co-Managing Director Peter Lowy said, "The real issue for us is not whether you've got 4 percent GDP or 3 percent or 2.5 percent, but the fact that we still have growth." Recently announced mergers and acquisitions like Intel's purchase of McAfee or BHP's bid for Potash say the same in action.
Add to these signs fast-growing Emerging Markets, solid eurozone growth, and overall expansionary US numbers, and growth isn't hard to see. While many ponder a yet-undefined double dip, the global economy is moving onward and upward with plenty of fuel to continue. Frustratingly, stocks haven't reflected this in the short-term past, but fundamentals don't always immediately translate to equity returns (and market negativity doesn't always translate to recession). Rapid earnings and revenue growth in recent quarters and short-term volatility have combined to make stocks ultra-cheap—a great bull market backdrop. Drip after drip, strong reports like these help erode double-dip fears—and likely push stocks higher in the process.
[i] Source: Thomson Reuters, "This Week in Earnings," August 20, 2010.