Corporate earnings are what really matters now

The biggest question going into the end of the year is what effect the debt ceiling debate and government shutdown will have on the economy and markets.

I’ve been of the opinion from the beginning that the debt ceiling will be lifted prior to a government default. You can read more here, on my blog.

As such I have kept the Covestor Dividend and Growth Plus portfolio fully invested. While we’ve taken a hit with the overall market, I expect it to be short term. If anything the government shutdown only diminishes the odds that Bernanke/Yellen can start the quantitative easing tapering anytime soon. With the Fed continuing to pump, I expect a year-end rally, likely to roll into 2014.

The real question going forward centers on corporate earnings. Quarterly estimates have been coming down for a year now, with current quarter growth now expected to be in the sub 2% range, with many sectors showing negative growth from a year ago.

But so far the market has shrugged off declining earnings growth with the continued prospects of the Fed continuing QE 3 and its zero interest rate policy. Wall Street seems to just assume that corporate earnings have to turn up and accelerate higher.

Also on the plus side has been a resurgent consumer, taking on near record amounts of debt. Corporations have also taken advantage of low rates by raising record funds via the debt markets. It would appear that we’ve had enough of deleveraging. While that may not be good when the next financial crisis hits, for now it bodes well for fourth quarter GDP and corporate earnings.

As for individual holdings, our obvious question mark is Newmont Mining (NEM). Though it seems even the gold bugs have abandoned the metal, foreign demand for physical gold remains strong. At its current price NEM yields about 3.6%.

Currently I’m willing to hang on a little longer and hopefully pocket that dividend. If consumer debt continues to rise, the labor market continues to recover, and housing demand stays strong, the economy may be be looking at an inflationary environment in 2014.

The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

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