by Jason Norris, CFA
Senior Vice President of Research
The Replacements
Who would have thought that one of the biggest stories of the week would be about replacement referees and a blown call on a Monday Night Football game?
The replacement refs were not the only ones blowing calls this week. Apple’s new iPhone 5 omitted Google Maps which, like the call in Seattle on Monday night, caused quite a stir and prompted CEO Tim Cook to apologize. In the long run, will it matter? We don’t think so. Our longer-term concern with the stock is how long wireless carriers (AT&T, Verizon, etc.) will continue to pay the hefty $300-per-phone subsidy to Apple. We saw earlier this week that China Mobile is holding off their launch because of this concern.
Limping Along
The Commerce Department revised their second-quarter GDP estimate for the third time this year—from a 1.7 percent to a 1.3 percent annual growth rate. Durable goods orders were weak and personal income growth slowed. Stagnant economic growth is more than a U.S. and European problem, now that we are starting to see cracks in China’s Wall of Growth. Nike cited slowing in China for their disappointing growth numbers. We have also seen cautious outlooks from Caterpillar, FedEx, Norfolk Southern and global shipping company Maersk. This has been a common theme the last couple of weeks. Thirty companies have revised their earnings forecasts in the last three weeks and 90 percent of those have been negative. During this time, stocks are roughly flat. We will see if the liquidity rally in equities will hold up in the face of slowing fundamentals.
A Tailwind in Seasonality
One thing that equities have in their favor is the calendar. Historically, stocks rally in the fourth quarter of the year. October can be mixed, but overall the trend is higher. Since 1942, the average return for the S&P 500 in the fourth quarter is about 4 percent. We expect another eventful fourth quarter in 2012 with the election as well as another debt ceiling debate. Can stocks continue their strong 2012 run this time? What we know for sure is that, in six weeks the election will be over and more certainty will come into play, which the markets tend to like.
Our Takeaways for the Week
- While equities have exhibited strong returns in 2012, we still believe they are attractively valued
- Slowing economic growth will be a headwind to the equity liquidity rally over the next few months
- Consumers have remained resilient as evident by the lines outside of Apple stores to purchase new iPhone 5s