Earnings Week kicked off on Friday as seven major market-moving companies reported their numbers; five of the seven companies posted better than expected earnings. Alcoa Inc. (AA) reported $0.01 earnings per share, beating market expectations of -$0.04. Other companies that reported positive earnings were Google Inc. (GOOG), JPMorgan Chase & Co. (JPM), and Wells Fargo & Company (WFC). Despite these reported positive earnings, and the S&P having its biggest two-day rally for 2012 this week, investor concern continues to loom over world economic issues, which have taken the majority of blame for dragging the markets down this week. Spanish bond yields reached a dangerous level of 5.99% earlier this week as borrowings from the European Central Bank (ECB) jumped by almost 50%. A 5.99% yield is considered to be at a dangerous level for Spain because market experts use the 6% level as a point where government debt begins to be unsustainable.
China posted an 8.1% growth in GDP, which was lower than an expected 8.4%, signaling slowing growth for the exporting nation. It seems as though these economic issues have had more of an effect on consumer confidence than this week’s positive earnings; issues regarding Spain’s bond yields, China’s slower growth, and the encompassing Eurozone crisis have created some speculation among market experts that global growth might be slowing. The S&P 500 is up nearly 8% and the Dow is up over 4% year-to-date; these figures may help ease some of the ensuing investor concerns as a rough week on Wall Street closes.
– Charles Stack
The Double-Digit Days are Over
The days of 20-30 percentage gains seem to be long gone. It is rare to see astronomical equity gains like those attained by Microsoft Corp. in the 1990’s, where double-digit returns were almost the norm. This is certainly not the case in 2012: world flattening occurenes like the onslaught of the internet have fueled the efficient market hypothesis theory*, which states “it is impossible to ‘beat the market’” because the price of a stock always reflects all relevant information. The internet has given investors nearly immediate access to information that hinders an investors’ ability to spot those high return anomalies in the market. This clearly demonstrates that information is power, and it’s streamlined introduction to the world can be accredited to the internet.
So what may years of double-digit returns do to the investor psyche? A positive year of double-digit returns may have caused investors of the Dot-com bubble to have high and somewhat unrealistic expectations for market returns. World market activity since the Global Financial Crisis, a.k.a. The Great Recession (2007-09), demonstrates the need for investors to temper high market outlooks and possibly consider a macro-economic perspective versus expecting instant short-term astronomical gains through market speculation, because those days are far and few between.
– Justin Garcia
Article submitted by: Charles Stack and Justin Garcia of the Capital Markets Lab (CML). To learn more about the Capital Markets Lab (CML) please visit https://business.fiu.edu/capital-markets-lab/.