Q1 Earnings Season Preview - Why 2009 Is Not 2008

Includes: AAPL, QQQ, SPY
by: Jason Schwarz

Human nature always wants to get in the way of successful investing as it seeks to reward or punish the past. The maddening reality of the stock market is that it is forward looking. While the media and analysts love to digest the past, successful investors are already 5 steps ahead forecasting the future. This phenomenon is difficult to grasp and it is the reason why many lose money in the market. How can Google (NASDAQ:GOOG) report an unbelievably great quarter but their stock sells off? How can Google report a subpar quarter and their stock surges? It’s all because of the expectation for future performance.

This tug of war between the past and the future is in full swing as we enter Q1 earnings season. Economic data is showing its worst readings of the recession, corporate earnings will be horrendous, and most think this will lead to the next leg down in the stock market. Human nature would tell you that the stock market should tank in such an environment, but will it? Let’s look at some differences between today and 2008:

  1. Data Interpretation: In 2008, navigating the release of economic data points was like navigating the minefields of a war zone. Employment reports were met with huge selloffs. Decent earnings reports were sold down as even the good news was interpreted as bad news. Those who were long the market were endlessly frustrated at the market’s interpretation of the data. In 2009, it’s been the opposite. The unemployment rate reaches 8.5% and the market goes up. Apple (NASDAQ:AAPL) reports that February Mac and iPod sales were down 20% year over year but the stock climbs from $80 to $115. Bad news is treated as if it were good news. Human nature wants to focus on the current fundamentals and punish the stocks. Human nature can't believe in this rally. But human nature is wrong when it comes to stock market performance.
  2. Uncertainty: 2008 was the year of uncertainty. Americans elected a President who had relatively no voting record. Bank regulatory requirements forced writedowns and capital raises that threatened to send most banks towards nationalization or failure. The government decided who would receive support and who wouldn’t. The masses believed in the peak oil theory that suggested we were about to run out of the commodity. Steve Jobs was about to die. Politicians had to use fear tactics to get bailout money approved. Consumers hunkered down and stopped spending. And on and on and on.
  3. What’s On The Horizon: 2009 is the year of unprecedented government intervention. Obama’s $787 billion stimulus package is the biggest in the history of mankind. Trillions of dollars have been thrown at the banks. The Fed, Treasury, and Congress are working together with regulatory agencies to solve the problems. Such solutions did not exist in 2008.

Conclusion: Although this earnings season will show us the worst of the recession, stocks will persevere and even go up on the bad news. Strong earnings results in 2008 sold off, terrible earnings results in 2009 will go up. The majority of economic data points that we track have started to show improvements in their declining rate of change. The worst is behind us. Uncertainty has been replaced with concrete plans of action. It’s time to alter your set of bear market investment rules that have been in place since the economy began contracting back in 2007. For the new rules, purchase a copy of my digital investor handbook called ‘The Crash and Burn of Buy and Hold’. Adapting to the new conditions is essential for high returns.

The rate of economic contraction is getting better and the stock market will price in the improvements before human nature catches on. The question of the day is whether or not you should buy the index (SPX, QQQQ) ahead of earnings. The 2009 market is telling you that the environment is different than it was in 2008, and yes, the indexes should be bought.