- - Thursday, January 5, 2012


In the past few days, many have recapped what did or did not happen with the stock market in 2011 and offered prognostications for what lies ahead in 2012.

For those who are unaware, the Standard & Poor’s 500 returned 0.0 percent in 2011, ending the year pretty much in sync with where it ended 2010. When looking at such figures, I try to look for some context, so here goes. While the overall stock was flat in 2011, the average mutual fund lost 2.9 percent last year, according to Lipper Inc., a division of Thomson Reuters.

While worse than the market index, mutual funds fared better than hedge funds did in 2011. On average, hedge funds, which are special investment companies with limited groups of investors that may employ more exotic investment strategies, including short selling, returned -7.3 percent for all of 2011, according to the Dow Jones Credit Suisse Long Short Equity Hedge Fund Index.

Despite recent signs that the domestic economy continues to recover, investors, perhaps feeling the pinch of poor investment performance, redeemed funds during 2011. Lipper’s preliminary fund-flows numbers showed equity mutual-fund investors were net redeemers of equity-fund assets during 2011, pulling out an estimated $74 billion from the conventional funds business, excluding exchange-traded funds (ETFs). Withdrawals from equity funds continued during the last week of 2011, according to estimates from the Investment Company Institute.

As I wrote last week, I expect the volatility that characterized 2011 to continue into 2012 as we contend with slowing in Europe and China as well as the associated ripple effect, the 2011 campaign and election, and continued domestic debt and deficit issues.

Next week will set the near-term tone, in my opinion, as the year-end 2011 earnings season begins. Unlike most other earnings-reporting periods, year-end includes not only a wrap on the recently completed year but looks ahead for the coming quarter as well as the coming year. Needless to say, given what lies ahead over the next few weeks, I will be listening intently for subtle and not so subtle changes in corporate outlooks, be they good or bad.

Even before the fun kicks off next week, we have to remember that in recent weeks, 96 companies revised fourth-quarter outlooks lower, versus 27 that shared an improved one, per data compiled by Barron’s. Examples include E.I. du Pont de Nemours & Co., which cut its outlook, stemming from slower-than-expected consumer electronics sales; Tiffany, which missed its earnings expectations; Illinois Tool Works, which warned that Europe remains challenging; and the Gap, which missed December sales forecasts.

The result has been a drop in earnings expectations for the overall S&P 500 to 8.6 percent, to $24.50, for the recently completed final quarter of 2011 compared with the comparable period for 2010. By comparison, in early October, Wall Street estimates called for year-over-year improvement in S&P 500 earnings for the final 2011 quarter as high as 15 percent. In plain speak, analysts have cut expectations by nearly half during the last quarter of 2011.

Moreover, based on current expectations, the earnings growth rate is expected to slow further heading into 2012. Wall Street consensus estimates call for the aggregated S&P 500 group of companies to deliver earnings growth of 6.6 percent in the first half of 2012 but 5.9 percent in all of 2012. Simple sandbox math shows that those expectations imply further slowing in the second half of 2012.

If revised December 2011 S&P 500 earnings expectations are correct, this would mean that expected earnings growth in 2012 is to be but a fraction of the 13.5 percent earnings growth achieved in 2011. With that perspective in mind, an S&P 500 at current pricing levels and trading at 12.4 times expected 2012 earnings is not as cheap as some might have you think.

Stay tuned as we navigate Wall Street and Main Street in coming weeks and months.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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