With huge equity rallies from the lows across Japan, US, and China, markets are trying to decide if this is anticipation of growth or if it's the euphoria from surviving a near economic-death experience. Unfortunately with retail sales and industrial production collapsing around the globe, it should come as no surprise that earnings for companies worldwide are a disaster.
The canaries in the global trade mine are China and Japan. Chinese growth is expected to slip to 6% this quarter as the global economy has seen a massive drop in demand for their exports. Japan is experiencing a similar situation and has now seen many months of declining exports. There are questions being raised over the Chinese stimulus package's ability to generate economic growth to stimulate earnings growth. For the first time on record (since Feb 2007), Chinese industrial companies profits dropped for January and February. Net income cratered 37.3% from a year earlier to 219.1 billion yuan ($32 billion) according to the Chinese statistics bureau.
On Thursday, the Commerce Department released updated US GDP figures and earnings for US companies. In the final months of the year, US corporations earnings contracted by 16.5% and saw $250 billion disappear. The financial sector remains the poster child for the global economic collapse and it's profits fell $178 billion. This the steepest drop in 55 years and Q/Q was down more than 20% according to the WSJ.
The big question remains: do we ignore what is happening currently and focus on the potential first shoots of growth this spring? Or do we shift from a focus of survival/solvency to returns? As I posited this week, we have clearly found a bottom for equities and need to find earnings to support an additional rally. Best Buy was a good first step. 16 more companies are set to report and may give us some insight into the future. KB Homes said that it's fiscal first-quarter loss narrowed sharply amidst fewer write-downs.
As far what the near-term the future, our Mark Steele writes, "Though many groups are still near their lows, the rates of decline of some cyclical groups have turned the corner and have first-stage outperformance trends: Steel, Home Builders, Construction Materials, Fertilizers & Ag Chemicals. Also, the “hiding grounds”, or consistent outperformers: Biotech, Pharmaceuticals and Utilities are breaking their outperformance trends."
Without question, the market is looking forward and this is reflected in the big rallies from the lows. However, we've run a long way on a series of positive data/information that has come out over the last two weeks. We're going to need to spend time bouncing around in ranges from the S&P 500 (780-840) to the 10 year note (2.5% to 2.9%) to the US dollar (82-87) before we can gain certainty that the worst is over and that our past isn't going to catch up to us.