Dollars & Sense: After a weak jobs report, more trouble ahead

BY CHRIS HANLY

Investment Consultant, Gary Goldberg Financial Services

Year over year, the S&P 500 has now risen nearly 20%, and is up over 11% year to date. Over the same time frame, corporate earnings have only risen about 7%. Although markets are cheering some of the recent economic data and the progress being made in Europe, the Gary Goldberg Financial Services Investment Committee is beginning to sound some alarm bells and warns investors not to get too bullish. Last week’s jobs report is one of the worst on record – not because job growth only came in at 96,000, but because the labor participation rate dropped to a record low. Only 63.5% of American’s are part of the labor force (I’ll spare you the technicalities, but believe me when I tell you we need more people at work). I also believe that last week’s warning by Intel, which lowered its revenue forecast, is just the beginning. Our analysts believe that earnings guidance and estimates will continue to be revised downward steadily. Q3 guidance is becoming more negative, with negative preannouncements and surprises outweighing positive news by 2 to 1. Of course there are some positives as well. In my view, absent any major new developments in Europe or elsewhere in the world, I anticipate the next two months will be reasonably constructive for investors, likely booking some further gains in all major indices. However, as the election nears and passes, investors might be in for a rougher ride.

So, what should investors do? In short, look for quality, size, and revenue growth. Let’s take a look at financial shares as the ultimate example. Financials have led the markets so far this year, with the SPDR Financial ETF (S:XLF) gaining more than 20% YTD. Investors have been focusing on the fact that financials had the highest earnings growth rate of the 10 S&P sectors, increasing EPS by 62% in the past year. But, revenues have only grown by 2.2% over the same period. Moreover, if you exclude Bank of America, the EPS growth rate for financials drops to +11.7%, and brings the overall EPS growth rate to the S&P 500 to a meager 1.5% (from its current trailing growth rate of 6.5%). Investors need to focus on names that have strong balance sheets, pay a “healthy” dividend, and have a fundamentally strong business that will continue to grow revenues. Feel free to contact us if you have doubts about your portfolio’s quality and strength.

Christopher Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern and can be reached at (845) 368-2900 ext. 247 or chris.hanly@garygoldberg.com.