US Reporting Season is Defying Expectations

By Dale Gillham | Published 04 February 2020

Having come to the end of the second week of reporting season, it appears that the market is surprised by the results. Initially, it was expected that earnings would decline by around 0.03 per cent but instead we are seeing a slight rise. With only two weeks to go and roughly 40 percent of the companies in the S&P 500 having already reported, the charge of positivity is being led by the technology companies, such as Microsoft, Apple and Intel. This is not surprising given the rise in price for each of these companies in the last quarter of 2019.

This week Google (Alphabet) will report and I am expecting the good news to continue. Other companies that will also be reporting this week include Disney, Ford, GM, Qualcom, Berkshire Hathaway B, and Uber.

While it is anticipated that all of these companies will continue the trend of reporting better than expected earnings, Ford and GM will be of particular interest, as both companies have been bearish over the past few years. Now that Phase 1 of the US China trade deal has been struck, it will be interesting to see if it effects these two stocks.

The dip in the S&P 500 and the Dow Jones Index last week caused a lot of stock market noise and speculation around news that the coronavirus was responsible. However, let me say that the market is simply doing what it was already going to do, which is why it is important to understand how markets unfold:

  • The market will have a high and a low every year,
  • The market will also fall at least 8 to12 percent every year, and
  • Every four years the market will have a larger fall in price of between 15 and 25 percent.

For example:

  • From May to June 2019 the S&P 500 fall 7.5 percent in four weeks,
  • In January 2018 the S&P 500 fell 11.84 percent in two weeks, and
  • In December 2018 it fell 20.21 percent over thirteen weeks.

Since the 22nd of January this year the S&P 500 has fallen just over 3 percent to the close of trade on Friday last week, which is nothing in the big scheme of things. I expect this fall will last up to four weeks and fall by around 12 percent. If we see an 8 percent fall, then the S&P 500 will fall to 3,070 points and if it falls by 12 percent, it will fall to around 2,930 points. Coronavirus or not, the current dip is simply because the market has been very bullish since October rising by 12 percent in 78 days; therefore, it needed to slow down a little. Nothing more, nothing less.

Given this, I recommend investors avoid catching a falling knife by buying stocks just because they have fallen in price believing they are cheap. Remember, they can always get cheaper. Buying in dips can be fraught with danger; therefore, I recommend you wait for the market to settle before making any decisions.

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