The Lessons Storms Bring

11/24/2011 12:30 pm EST

Focus: MARKETS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Whether the storm is literal or figurative, it brings a lesson or two along with the dangers, say Jim Lowell of Fidelity Investor.

I’m penning this paragraph with due thanks to the mortals who keep divine electricity humming. After a major snowstorm with near hurricane-force winds, power outages remain the rule in some streets of my town—my street included.

With my daughter deep into Homer’s Odyssey and my son steeped in the battles of the Civil War, it was all hands on deck to secure our home’s cargo of heat from seeping into the whorl.

With a fireplace, plenty of wood, and a clutch of shipwrecked coal we had gathered instead of beach glass on the island we call our summer home, and a gas grill well equipped to flip the Sunday burgers that are requisite for cheering on our Patriots, we settled in to a radio show of the big game.

In the aftermath of the blowdown, we calculated that we came out ahead, way ahead with much less. That’s a principle the Eurozone and the US needs to live more than less by. With pressing social needs growing, not diminishing, and policymakers having accelerated economic risks for political, not economic, reasons, outages remain the rule.

That’s why, even if we do get the year-end rally that I continue to think we will get, 2012 will be the frame wherein the 2011 Eurozone patch and the patchwork of mini-stimulus plans here at home get peeled back to see if they healed all wounds or only hid more festering.

You know that in terms of economic gains, I am not encouraged by what I see politically. The class warfare that was unfortunately easy to predict at the outset of this year is here to stay for the 2012 election year. But to counter those who say there is no path forward and proffer only staged retreats, and to lessen the noise of those who claim to be pathfinders par excellence, I continue to try to simply let the market have a say.

Against the gain of consensus forecasts, I thought that October’s economic and earnings data would continue to present a slow growth, not a growth landscape; they did so. I also said that I thought the economic reports like durable goods, Beige book, GDP, Leading Indicators, regional manufacturing reports, and more would lay the foundation for better-than-consensus earnings to build upon. Build they did.

We know that the Eurozone remains the storm cloud over that landscape. The longer it lingers and the more it grows, the more threatening it becomes.

But against that backdrop and foreground, and against such in the decade past, the market has been able to provide an answer that I think will continue to help us compass our path from here to year-end and beyond. The answer: focus on the economic and earnings fundamentals not the froth of those who offer a half-empty or half-full glass.

We’re still stuck with the familiar pattern of 2011: every utterance by a prominent European financial leader seems to cause the markets to spike higher or lower. The refrain of double-dip recession is also unlikely to fall silent any time soon, both for salient and salacious reasons.

But every time more oxygen is pumped into such a toxic environment, attention can and will be paid to tangible economic and earnings evidence of and for recovery remaining the most probable outcome for 2011. (If that refrain sounds familiar, it should: it was at the core of my assessment of and for the market back in January of this year.)

NEXT: Earnings Don’t Point to Recession

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Earnings Don’t Point to Recession
Speaking of earnings, we have seen more than 70% of the S&P 500 companies beat consensus estimates, with several major bellwethers upping their guidance and some announcing multibillion-dollar buybacks to boot.

Bellwether GE (GE) reported 18% profit growth in the third quarter. GE is forecasting that earnings will rise at double-digit rates next year as well. Intel (INTC) blew through its earnings numbers, raised its outlook, and announced a $10 billion stock buyback, suggesting its executive leaders view their shares as undervalued.

In the banking sector Bank of America (BAC) delivered profits, due more to cost-cutting and accounting gimmicks than any net increase in business. However, American Express (AXP), another of my preferred bellwethers for consumer and small business spending, reported robust profits and a significant increase in members’ use of their cards.

Most Amex card users pay their bills off each and every month rather than racking up debt. Their ability to increase spending and pay off debt are both bullish signs, in my view.

Caterpillar (CAT) reflected the theme we’re long and strong on: slow growth, not no growth, remains the global rule. Cat’s numbers were strong thanks to a significant uptick in demands for metals and mining related machinery, but thanks to recent events in Iraq and Libya, I think economic demand and increased volatility in the Middle East and North Africa will make their oil market-related business a 2012 boom, not bust.

McDonald’s (MCD) recession burgers continue to sell like hotcakes here, and overseas the same burger translates into a brand America burger where consumers look to the sesame seed bun to confirm the special sauce of their status. And two more blue-collar bellwethers also painted a surprisingly strong picture of US consumers’ willingness to spend on big-ticket items.

Moreover, October’s retail sales reports presented a surprise upside for those who said the consumer’s goose was cooked. Retail sales in September were up 1.1%, the largest gain in seven months. But what many failed to notice was that sales for both August and July were also revised upwards.

The Upshot
October’s economic and earnings results confirm a tenet at the core of my cautiously optimistic reasoning: even as the risk of recession may yet rise, its toll has yet to be heard in a way that dampens consumer spending. For a consumer-driven economy, that’s very good news.

Even better: such rises in spending come at a moment when confusion is high, confidence is low, and 20 million or more former consumers are un- or underplayed to the point where any nominal, even seasonal uptick in hiring will translate into a windfall in spending and profiting that isn’t current expected by consensus and hence isn’t priced in across the markets.

Of course, all the known switches can and likely will lead to more periods of lights out. But even that is the case, we have learned to live with it, and still come out ahead.

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