Saturday, May 9, 2015

drip . . . drip . . . drip . . .

Companies are required to disclose their financial results on a quarterly basis.  This is known as the "confession season."  Stock analysts estimate the company's total earnings and earnings-per-share beforehand.  Their estimates are then averaged and published.  Normally, a company's stock will increase if their financial results exceed the estimates or decrease if they don't.

The same reaction is true for the market indices, such as the Dow or S&P 500, compared to economic estimates.  Economists prepare the estimates.  If the economic data released is better than the  estimates by economists, the stock market indices usually increase.  If the data doesn't beat the estimates, the stock market indices usually decrease.

Yesterday's release of the monthly "Jobs Report" was unusual, because the data almost exactly met expectations, i.e., 223 thousand actual jobs compared to estimates of 228 thousand.  The stock market should have not reacted to hitting the estimates.  There should have been no reaction.  Instead, the Dow soared 267 points or 1.5%.

This tells me that the stock market didn't really believe the analysts' estimates and had not priced the securities to meet those expectations.  There must be a reason for this.  I think the slow drip of weak, but not bad, economic data coming out of the winter has worn down the natural optimism of investors, just like it did last year.

The final estimate of first quarter GDP is not yet available but is expected to be weak, even negative, just like last year.  Early estimates of the second quarter are in the 2.5% range, just like last year.

Now, do you really want to "sell in May and go away" . . . or just stop listening to the short-term dripping.