The State of our Economy is Good

Zacks

Tuesday, February 12, 2013

Stocks haven’t done much in recent days after reaching milestone levels, but they haven't lost much ground either. Today’s session will likely be not much different given the dearth of any positive catalysts. This morning’s batch of earnings reports was a bit on the mixed side, with Coke (KO) and Avon (AVP) coming out with positive surprises, while Goodyear Tire (GT) providing an underwhelming outlook for the year.

The major event of the day is the President’s State of the Union address to Congress later this evening where he is expected to touch on the economy. There is no indication from both sides in Congress of any plans in the works to stop the budget sequester from taking effect in about two weeks time.

Notwithstanding the budget uncertainty, the state of our economy is in fairly decent shape. The last GDP report may have showed a negative growth rate, but that was largely due to factors that are not the most enduring pillars of growth anyway. The factors that matter – household and business spending – showed excellent momentum in the fourth quarter and appear resilient enough to keep the economy afloat. The reviving housing sector adds further to this improving outlook. The automatic spending cuts resulting from the budget sequester pose a threat to headline GDP growth this year, but many not do much damage to this underlying improving trend in the economy.

Government spending matters, but what matters even more is the spending outlook for the private sector. And based on what we saw in the fourth quarter GDP report, the outlook for private sector spending – from consumers and businesses – remains positive. A key question at this stage is what impact the payroll tax increases that went into effect at the start of the year as a result of the Fiscal Cliff deal will have on consumer spending. We will get some idea on that front from the January Retail Sales numbers coming out Wednesday, but we will know the full impact only over time.

The fourth quarter earnings season is winding down, though we are still weeks away from officially closing the books on this reporting season. In addition to the earnings reports this morning from Coke, Avon, and Goodyear Tire referred to earlier, we got positive surprises from Michael Kors (KORS) and Fossil (FOSL). As of this morning, we have fourth quarter earnings reports from 355 S&P 500 companies or 79.4% of the index’s total market capitalization. Total earnings for these companies are +2.9%, with 66.5% of companies beating earnings expectations. Revenues are up 1%, with a much stronger 62% of companies beating revenues expectations. This has been a better than expected earnings season, largely due to the subdued expectations ahead of the reporting season. Expectations for the coming quarters been coming down, particularly for the first half of the year. But there is still plenty of room for further downward adjustments.

Sheraz Mian
Director of Research

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