Earnings season has gotten off to a rough start. There are several factors in play this quarter. First, the rise of the dollar may hurt the earnings of the large multinational companies who were not properly hedged. Second, it is still to be determined how the drop in oil prices will affect overall S&P500 earnings. It will definitely have a negative impact on the oil sector; however, it will be a positive influence on many other industries due to a reduction in operating cost. We still believe the drop in oil prices will have a net positive effect on overall corporate earnings and on consumer spending.
We maintain our view that market weakness near term creates an opportunity rather than a reason for broad concern. The market may adjust to a change in earnings outlook but valuations are still compelling when compared to other asset classes. For example: You can put your money in a ten year US Treasury and get 1.76% and bank rates remain extremely low. Interest rate risk in the bond market will soon come to fruition as prices fall once interest rates begin to rise. With little competition for equities, we remain bullish intermediate and longer term but do expect a relatively bumpy ride this year.
The economic outlook continues to improve and even today the consumer confidence reading for January came in well above expected. New home sales in December also released today beat expectations handily.
It is of interest to note that last January at about this same time we had a market correction of about 7%. The dip was soon bought and anyone who made an emotional decision got whipsawed as the market reversed course to achieve new highs once again. Batten down the hatches near term but we believe patience will again be rewarded.