It's that time of the year again — earnings season. The impact of this difficult recession will clearly be evident in this coming quarter's earnings as the teeth of the downturn takes hold. And what we see in the next 45 days will give us a sense of how much impact there has been.
Expect a lot of impact.
As you analyze the reports coming over the next several weeks, remember that the market and equity prices are really all about expectations. Stock prices, economic data, and corporate earnings don't move simultaneously. Instead there tends to be disjointed movement based on hope and fear. This is commonly referred to as the expectation factor. What we'll see in the next 45 days will give us insight into what to expect for the rest of the year.
Given current circumstances, it shouldn't be a surprise for earnings to be dismal. But incredibly, some will be shocked.
It's foolish to be disappointed when earnings fall in global recessions. But often investors (and some investment professionals as well) remain eternally optimistic and then are bitterly disappointed when the reality of circumstances crashes their euphoric party. Expect challenges and read between the lines as the reports start coming in.
Assess and understand. Listen to companies describe the extent of the damage to their earnings based on crashing global growth. See how they are reacting and what steps they are taking to be more efficient. Are they being strategic?
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Assess if management is acting nimbly or instead simply rolling over and letting circumstances overtake their company. Be tough when you assess corporate reactions to difficult times. Anyone can do well when times are good. Great leadership emerges in challenging times. Poor leadership wallows in victimization.
Analyze the results. Make a decision on your outlook based on your economic perspective for the next 12 months. If you see a silver lining, it might be the time for you to move against the herd and invest for the coming recovery. If you see danger, then act on that as well.
Analyze, think, and react. It's what great investors do.
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Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.