- - Thursday, September 27, 2012

ANALYSIS/OPINION:

Early this week, investors saw a modest jump in consumer confidence in September, according to the index compiled by the Conference Board. The good news: The September reading climbed to 70.3, up from 61.3 in August and reversing the July-August dip. The so-so news: The September reading, while better compared to recent months, remains below February’s reading of 70.8. The bad news: Despite the rebound in the index from its late 2008 lows, the metric remains well below the pre-Great Recession levels. In other words, while consumer confidence is rising, it’s difficult to characterize it as being high.

We need to keep in mind that consumer confidence reflects current sentiment, and tends to mirror the unemployment rate, gas and food prices and the stock market, as well as the housing market and other factors. With the S&P 500 up roughly 15 percent year to date and nearly half that move coming since July 1, with falling commodity coffee and cotton prices, and with an improving housing market, it’s understandable that consumers are feeling better.

Over the last few weeks, however, there have been a number of other developments that have raised the risk profile of the stock market. First and foremost, a number of companies have pre-announced weaker-than-expected results for the current quarter. In early September, FedEx — which is set to report August-quarter results Tuesday — cut its earnings-per-share guidance range to from $1.37 to $1.43 from the earlier estimate of $1.45 to $1.60.


FedEx was not alone.

In the past few weeks, thanks to weak demand, rising costs or both, business outlooks have been cut at Spirit Airlines, Werner Enterprises, Globecomm Systems Inc., filtration products manufacturer Polypore International Inc., farm equipment retailer Titan Machinery, AK Steel, United Natural Foods Inc. and data-storage provider Xyratex. Two more prominent companies issued their own warnings — Norfolk Southern cut its outlook, citing weak coal and merchandise demand, and MasterCard warned of slower revenue growth ahead.

Perhaps most perplexing was the announcement by heavy construction equipment manufacturer Caterpillar Inc. that slices the company’s outlook for 2015. Yes, you read that correctly — 2015. While Caterpillar stopped short of forecasting a global recession, “We expect fairly anemic and modest growth through 2015,” according to Caterpillar CEO Douglas R. Oberhelman.

Given the diverse uses for the company’s construction, earth-moving and agriculture equipment, it is considered a key barometer for the manufacturing, mining and construction sectors. What stands out most is Caterpillar’s downgrading its prospects fully three years out. In my experience, that means the strength of the underlying assumptions are crumbling. Verification of that can be found in the falloff of new orders over the past several months, as well as continued weakness in purchasing-manager surveys in Europe and Asia, particularly China.

The combination of negative company pre-announcements and weakening manufacturing and order data over the past few months suggests we are likely in for another round of “one step forward, two steps back” for the economy. Add to this the fact that the stock market rise has been called by a “nervous rally” because of low trading volumes, and it seems likely that investors will look to lock in year-to-date gains and once again flock to the sidelines as we head into corporate earnings season.

Corporate earnings season tends to be a period of extreme volatility as traders zero in on the latest news each and every day. With uncertainty climbing, the coming weeks will resemble a roller coaster, with one day’s good news vaulting the market higher and the next day’s bad news driving it lower.

These market swings can be a boon to patient, long-term investors looking to scoop up shares of well-positioned companies. While the stock market may be challenging up ahead, do your investing homework now so you can be prepared to capitalize on it.

As Winston Churchill said, “The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.”

Chris Versace is the editor of the PowerTrend Brief and PowerTrend Profits newsletter. Visit them at ChrisVersace.com or follow him on Twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.