Nice note here out of Citi Europe:
The 25% market rebound that started in early March has not coincided with the bottom of the earnings cycle. Since then, forward earnings expectations have continued their downward trajectory. Prices have decoupled from earnings. Have we arrived at the twilight zone? Our global strategists refer to this as the period during an earnings cycle where stock prices begin to stabilise but profits continue to fall.
2009 is shaping up to look more like a twilight zone. Earnings are falling faster than share prices, the market is re-rating, cyclicals are re-rating aggressively and earnings momentum strategies are struggling — all signs of twilight zones. Are we saying that the next bull market has started? No but we are saying that markets have stabilised and are unlikely to fall beyond the March 2009 lows. Earnings declines have further to go from here. So with flattening prices and falling earnings, we think this is the start of a protracted twilight zone. It is sensible to gradually increase exposure to risk through the year. But, near term we would be less willing to chase the current risk rally.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Onlooker
Hmmm. I don’t necessarily disagree with them but it’s a bit of a leap. What if earnings keep going down for a longer period of time than they seem to be assuming? And we are just talking about an assumption based on analysis of just the past two recessions. Pretty shaky evidence and there’s really not any good trend info there anyway.
You can pick out a period of time during those earlier recessions where prices were going up while earnings were still dropping; early ’92 and late ’01. I’m just saying that this thesis is rather thin and seems like a reach to justify the idea of the March low being THE low without being all out bullish on this rally. It’s just a leap of faith and hope, just like that being taken right now by those who think we’re in the new bull market.
Time will tell but this analysis doesn’t really help.
What are your thoughts TPC?
Cullen Roche
I agree. They’re basically calling a bottom in earnings which is not necessarily true. The same mistake was made during the 2001 bear market, but if you look at the market the earnings trough occurred at the same time the market bottomed. If the same were to occur here the market would not actually lead the earnings trough as Citi says.