At "A Dash" we are always trying to highlight good ideas from great sources. Today we got a research note with a fresh thought.
But first, a mini-quiz. What is the next number in this series:
-5.3, -8.2, -11.0, -1.2, 0, 0, 2.5, 3.6, -9.0, .......?
Can you make an inference from this series? Imagine that it is a question on the SAT!
The Fresh Idea
Has anyone notice the dog not barking in the night? JP Morgan Research did as follows:
Current NEGATIVE Preannouncements for 3Q at lowest level since 1997 and, historically, Negative Preannouncements inversely correlated to September stock returns . . . As we noted in our earlier commentary, one reason for the skittishness of stocks in September is the specter of negative preannouncements. Since 1995, the absolute level of negative preannouncements in 3Q (September quarter) is inversely related to performance of September (S&P 500). For 2009, NEGATIVE preannouncements are running at 259 – only 3 periods when NEGATIVE pre-announcements were the same or lower. In each of those years, the returns were positive, averaging 4.9%. As shown in Figure 7, this implies that the likelihood is higher for a positive September.
You need a relationship with JP Morgan for the full report, which is quite interesting.
Many observers disparaged the good earnings from the second quarter as the result of cost cutting without revenue growth. The market took a different view. The observation about earnings potential is reasonable, but it raises some questions. What more could companies do? With lower costs, they are poised for improving earnings if and when revenue increases. Do the skeptics see any winning scenario?
Stock market investors should beware of confusing their ideas about politics and the economy with corporate profits.
As investors, we are buying the earnings and/or cash flows of companies, not GDP futures.
The Mini-Quiz Answer
The series in the question represents the monthly September returns of the S&P 500 for this decade. Do you want to make an investment decision based upon your guess? We do not, as we described in this article about the September theory.
Our Take
A relatively modest economic rebound can fuel solid earnings growth.
