Barring a last-minute, epic compromise, the government is closed today. The stock market might be behaving badly as a result, too. Oh, and apparently Nostradamus predicted this would happen in his fourth quatrain. Thirst and famine are next.
Hey, with this Congress? Who knows! Of course, most Americans probably won’t even notice the shutdown.
In fact, on Monday morning, the ever-popular Josh Brown of The Reformed Broker blog captured the current zeitgeist of the nation in a single tweet:
“‘Whatever. Wake me up when there’s a Netflix (NFLX) shutdown.’ – America.”
Welcome to the sad state of affairs in America! We’ve simply grown immune to political brinkmanship. Of course, that won’t prevent the media from trying to scare us into caring about the shutdown. Ignore it.
What should we be focusing on instead? How about the only fundamental metric that’s going to matter once the government shutdown ends? It’ll soon be dominating the headlines. And rightfully so. Here’s the early scoop – and what it means for our investments …
Get Ready for An Earnings Onslaught
The first government shutdown in 17 years isn’t the only thing yesterday signified. It also marks the end of the third quarter. That means we’re about to get bombarded with third-quarter earnings reports.
And while stock prices have continued to rise in 2013, earnings growth rates are trending in the opposite direction. In the second quarter, S&P 500 companies reported profit growth of 3.8%. Yet estimates heading into this quarter call for only 3.2% growth, according to FactSet data.
That could prove problematic …
After all, stock prices ultimately follow earnings. If earnings growth sputters out, so could the current bull market. Investors simply won’t keep paying up for slower growth. Especially since, at its current forward valuation of 14.4, the S&P 500 is already trading above its five-year (12.9) and 10-year (14.0) averages.
To be fair, earnings growth rates always surge in the early part of a bull market, then level off over time. Given the unprecedented amount of monetary stimulus by the Federal Reserve, though, it’s reasonable to expect that the economy and corporate profits should still be advancing at a healthy clip.
The good news? Despite weak estimates for this quarter, we could be in store for an upside surprise. Here’s why …
Follow the New Leader
Aluminum giant, Alcoa (AA), traditionally kicks off earnings reporting season. But it got booted from the Dow last month. As a result, new Dow component, Nike (NKE), has become the de facto bellwether.
That’s not a bad thing, either, as the shoemaker’s sales boast a 97% correlation with U.S. GDP, according to Businessweek. That’s way better than Alcoa’s correlation of 84.8%.
Put simply, Nike is a far better proxy for the overall health of corporate America, which makes its earnings report last week all the more instructive. You see, the company reported a 38% increase in net income. Shares surged to an all-time high on the news, too, even though analysts expected weaker growth. If this trend of better-than-expected earnings growth plays out, there’s no stopping this bull market. If not, well … look out below!
Bottom line: The government shutdown isn’t the biggest threat to our investments right now. It’s earnings. And it’s only a matter of time before investors start focusing on this all-important metric. Rest assured, we’re already monitoring the reporting activity. And I promise to be in touch with any urgent buying opportunities.
Plus, at this stage of the bull market, we also need to be on the lookout for attractive short-selling candidates (i.e. – companies with rapidly deteriorating earnings). So stay tuned!