Tuesday, January 7, 2014

January’s Effect & Earnings Season (excerpt)

It’s early January 2014. So it’s time for the Q4-2013 earnings season to begin. At the end of the month, it will be time for the financial press to analyze the so-called “January Effect.” As goes January, so goes the year--so they say. We’ve set up a little publication to track this relationship.

A scatterplot of the performance of the S&P 500 during each January and its full year from 1947 through 2013 shows that there is something to the effect. Over the past 67 years covered by our analysis, January and its full year have been up 55% of the time. During only four years (1966, 1994, 2001, and 2011) were up Januarys followed by full-year declines. Down Januarys aren’t necessarily bearish given that they were preceded by 11 years that were up. There were 14 down Januarys followed by full-year declines.

While we are waiting to see how the month ends, there will be plenty of earnings news to digest. Most of it won’t matter much since it will be for the final quarter of last year, which has dropped out of the calculation of forward earnings.

Forward earnings is the time-weighted average of the current and next years’ consensus expected earnings. It is the "E" that I use in my P/E x E analysis of the market. Right now, it is identical to the expectations just for this year, but it will give less weight to this one and more to the next as the year progresses. Q4-2013 results will matter only if they significantly alter analysts’ expectations for 2014 and 2015, which seems unlikely to me.

Today's Morning Briefing: Earnings, Revenues, & Margins. (1) The “January Effect” is coming. (2) A scatterplot. (3) Another earnings season is starting. (4) Why it may not matter. (5) Analysts forecasting double-digit earnings growth. (6) Can 5% revenues growth produce 10% earnings growth? (7) Global PMIs confirming moderately upbeat outlook for revenues. (8) Emerging Markets PMI is rebounding. (9) However, NERIs are still negative. (10) Analysts predicting rising margins. (11) Margins could suffer if companies expand payrolls and capacity more rapidly. (12) For now, business spending on labor and capital lowest relative to GDP since early 1950s. (More for subscribers.)

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