Awful 2016 Earnings Should Lead to Unattractive Equities This Year

On April 19, 2016

The US economy is in a precarious position. There are three monthly economic releases that are important to iSectors’ work.  One is the unemployment rate, which rose last month due to more people entering the work force.  Although this is good for the economy, it is not good for wage growth since there is more labor supply.  If wage growth is not strong, retail sales growth will be weak as consumers will continue to pay down debt and save.  Two is retail sales, which was weak in the first quarter and the monthly trends give no indications that they will strengthen soon. Three is capacity utilization. February was revised down and the March rate was below consensus.  Declining capacity utilization indicates that manufacturing will be lower in future months.  Thus, we continue to expect weak economic growth in 2016 and for the Federal Reserve not to raise short-term interest rates this year.

The first quarter earnings reporting season started last week.  Given that the Fed is clearly not going to raise rates at the end of the month, the market will begin to focus on earnings over the next week or two.  Investors will be focusing on companies’ expectations for the full year 2016 revenues and earnings.  Although Alcoa, the traditional first company to release quarterly financials, reported good earnings for the first quarter, they guided full year revenue expectations lower. iSectors’ view is that stocks may test the May 2015 highs during this earnings season, but then retreat when the majority of companies have negative reports. We believe that stocks are near a short-term top and that 10-year Treasuries yields will decline and test the 1.60% February low (which is at 1.80% now).

iSectors® Implementation: The iSectors Post-MPT Growth and iSectors Post-MPT Moderate Allocations dynamically allocate between nine low to moderately correlated sectors to provide true diversification in every market environment.  Currently, both Allocations have about 50% positions in long Treasury Bond ETFs.  Please note that allocation holdings change monthly.  Please contact Scott Jones at 1-800-iSectors for the latest portfolio positions.

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