If you’re wondering why the stock market has gotten significantly choppier in 2014 after that strong fourth-quarter rally in 2013, the answer is simple: Investors are getting increasingly nervous.
Why are they getting nervous, you might ask?
A key reason may be disconnect between lackluster results for a majority of December 2013 quarterly corporate earnings reports and the stock market’s strong year-end rise. The stock market thus is caught in a wait-and-see mode. Here’s the question that many of the people I talk to on the floor of the NYSE are pondering: Is it just a handful of companies that are having problems, or have earnings expectations been too buoyant and need to be reset for 2014?
Uncertainty began with several retailers — Sears (SHLD), The Gap (GPS), JC Penney (JCP), American Eagle Outfitters (AEO), Bed Bath & Beyond (BBBY) and Pier 1 Imports (PIR), among others — sharing holiday sales that were not what had been expected by many on Wall Street. Soon thereafter, we heard the same from Best Buy (BBY) and hhgregg, Inc. (HGG). Plus, news broke about a new round of 5,000 layoffs at Intel (INTC) — roughly 5% of the company’s workforce. Other layoffs were announced by Target (TGT), Texas Instruments (TXN) and more, as well as rumored layoffs from IBM (IBM) and Sprint-Nextel (S).
That more-than-concerning news was added to this week when both IBM and Johnson & Johnson (JNJ) delivered quarterly results that were as expected, but fell short of their respective guidance for 2014. Even while many of the world’s who’s who meet in Davos and discuss projections for an improved global economy, we learned yesterday that manufacturing growth in China slowed in January, once again spooking the stock market.
As if that wasn’t enough to make the average investor a little worried about what lies ahead, the stock market, as measured by the S&P 500, is trading at 15x the earnings Wall Street expects it to deliver in 2014. As I always say, a stand-alone figure is meaningless without some context. First, that multiple is well above the 13.6x the S&P 500 bottomed at in 2013. More importantly however, it’s the underlying assumption of the S&P 500 earnings growth that is raising flags to many professional investors.
Let me explain…
I did some digging and found that the current consensus earnings per share (EPS) for the S&P 500 is $119.74 for 2014, up 10% from $108.58. For perspective, that’s nearly double the 5.3% the S&P 500’s EPS is tracking to have grown in 2013 vs. 2012. If the earnings misses outnumber the earnings “beats” for the December quarter and corporate outlooks are as clear as mud — which is something we have been seeing during the last few weeks — odds are we will see a negative revision to 2014 earnings expectations for the S&P 500. That situation will lead many people to question their lofty expectations for share-price valuation multiples. Thus, we could see the overall market pull back.
But as you and I know, few people buy the market; instead they buy individual stocks, exchange-traded funds (ETFs) and call options.
There have been a number of successful stock plays so far in 2014. Among them are several I recommended to subscribers to my trading service PowerTrader. Here’s an example — Skyworks Solutions (SWKS), a wireless semiconductor company that handily beat Wall Street forecasts and upped its outlook for what’s ahead. I recommended SWKS shares to my subscribers because the company sits at the center of the transformation that is going on in mobile — from smartphones and tablets to something far more ubiquitous — given the pending explosion in wearables, The Connected Home, The Connected Car and, as Cisco Systems’ (CSCO) John Chambers calls it, “The Internet of Everything.”
And SWKS is just one of the many double-digit percentage stock plays and triple-digit percentage call option trades that I’ve shared with PowerTrader subscribers. I chalk it up to the power of PowerTrend investing, which uses the intersection of economics, demographics, psychographics and a few other tools to see where companies need to be.
Fostering U.S. Jobs and Manufacturing with American Love Affair CEO Noelle Nguyen
While many businesses and entrepreneurs are using the online world to enhance their businesses and profits, few also are setting out to return manufacturing and jobs to the United States. One such company doing so is American Love Affair, an e-tailer that deals exclusively in goods made here in the United States. If you’ve listened to my PowerTalks with Abe’s Market about its online business model and Motorola Mobility about how and why it’s building its Moto X smartphone here in the United States, then you’ll get exactly what American Love Affair founder and CEO Noelle Nguyen is doing.
Throughout this would-be U.S. economic recovery, job creation has not matched what it has been in prior recoveries. In fact, we’ve seen more people dropping out of the labor force, while companies complain they can’t find the kind of workers they need. At the same time, there have been two structural shifts in the economy — the migration to online businesses, which is only accelerating due to the adoption rates of smartphones and tablets, and also the slow death of domestic manufacturing. Let’s face it, folks, that combination is a long-term recipe for disaster for the American middle class when it comes to jobs and incomes. It is not like it was when I was a kid, when a family could support itself with one parent working a middle management job.
Noelle and I also talk about why she founded the company and how she can compete with not only some of the bigger retail companies — The Gap (GPS), JC Penny (JCP), Abercrombie & Fitch (ANF), Macy’s (M) and others — but also with the growing online behemoth that is Amazon (AMZN). It’s a great conversation on many levels, and it will have you seeing the opportunity and ability to not only save but return both manufacturing and jobs here to the United States.
In case you missed it, I encourage you to read my PowerTrend Brief from last week about the trends to watch as traditional retailers struggle. I also invite you to comment in the space provided below.