The C-minus Economy

by | Jul 11, 2012 | General

And now corporate earnings stop growing

If your kid comes home with a C-minus on his report card you may be relieved to know he isn’t failing, but there’s no reason to be really happy either.

That’s where we are today with the US economy—growing slowly, showing no signs of accelerating, but not falling into recession. 

Unemployment remains stuck above 8% and construction remains weak, and if the story stopped there we would have to conclude we are in a recession.

But take a look at this chart. Auto sales continue to climb. Cars hardly wear out anymore, which means that few people “need” a new one, so autos are a great indicator of consumer health and confidence. This chart says consumers are feeling better, not worse.

But the slow growth economy is finally affecting one of the few strong areas—corporate earnings. They are expected to come in nearly flat this quarter when compared with a year ago. It’s hard to get stocks to rise when profits are flat. The odds favor a continuation of the trading range we’ve been in since the winter.

So while we’ve cut back on stocks, we still like the ones we own. In contrast to the flat earnings growth for the entire market, earnings in our portfolio companies should be up by an average of 15% this quarter. And estimates for the next 12 months are even better.

Our portfolios continue to perform better than the market and with the earnings growth differential getting wider, we think that might continue for the rest of the year.

Best regards,

Daniel A. Ogden

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