The latest quarterly earnings reports have begun to be issued in the U.S. With U.S. stock prices up 20% from the low three months ago and at a six-month high, it seems prudent to realize gains and reduce exposure. Momentum measures are still positive, so if that is your method of participating in markets, hang on but look for an exit.
Typical of periods of rising stock prices, there has been favorable news to support the rise in stock markets. Economic news in the U.S. has been getting better, and Europe is showing signs of stability in its financial system. I suggest not getting carried away.
I've noted previously that earnings expectations in the U.S. had been at historically high levels, which has been associated with poor subsequent equity returns. Estimates admittedly have come down, but they still reflect a 10% increase in 2012. By a recent count, 96 companies in the S & P 500 had revised their fourth-quarter estimates downward, which is the most since 2001. Perhaps coincidentally, the S & P 500 declined 22% the following year, 2002.
I am not suggesting an imminent drop of more than 20% in stock prices. I am, however, reminding that profit margins are at historic high levels, and year-over-year profit comparisons will soon face a significant headwind. The typical S & P 500 company derives more than 40% of revenues from abroad. The strength in the U.S. dollar last year means that over the next several quarters, foreign revenues at U.S. companies will have to be converted into more-expensive U.S. dollars than a year ago. This will reduce revenues and earnings reported in U.S. dollar terms (all else equal).
It makes sense to me to raise some cash from U.S. equities.
Steve Lehman
LehmanInvest.blogspot.com/
S & P 500: 1315
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