Good Economic Data Meets Bad Earnings: Which One Is Wrong?

Jeff Macke

On paper we're all feeling pretty good right now. This morning's first read on Gross Domestic Product for Q3 came in at 2%, and University of Michigan Consumer Sentiment index for October was in at 82.6; a five-year high. Away from government data and surveys, which is to say "in the real world," markets are on the slide and corporate earnings relative to expectations are a disaster. (See Related: Earnings Shortfalls: How to Distinguish Opportunity from Disaster)

Mark Lehmann, president of JMP Securities, acknowledges the clearly disappointing earnings and grim outlooks but thinks they're obscuring the larger picture. Even with the 4% drop since October 18, the S&P 500 is up over 11% year-to-date. Most individuals would have been delighted with this at the start of 2012, "Yet we're here, and now people are getting disappointed."

It's less that investors are ingrates and more about being terrified. The trading chop of the last decade has exposed the buy, and hold has seen gains repeatedly nullified by horrific drops. From April 3 to June 1 of this year the S&P dropped 10%. Those who held through the ensuing five months are back to even. Most folks would rather avoid that type of round trip.

Lehman says to stick with stocks and stay domestic. 2013 and beyond are going to be much better than expected, as he sees it, carried by "big macro tailwinds." An obsession with the fiscal cliff and a tight election — and all the uncertainty created by both — is making things seem darker than they really are, at least as Lehman sees it.

On conference call after conference call companies are telling us that the economy is being frozen by confusion over what happens next year. Companies have announced 62,000 jobs since September 1, the biggest two-month total since the start of 2010. The economy is freezing, by all forward-looking evidence.

Investors who think corporate America can reboot and get moving again after the fog of uncertainty lifts should be starting to pick away at the long side. If you think the jobs won't be coming back anytime soon and that corporate earnings will collapse, it's time to take some profits. If you just want to ride it out and see what happens, it's time to buckle up.

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