The problem with kicking the can down the road is that sooner or later, the road ends.
Evidence of this can be found in recent stock market performance. Quantitative easing created a mirage, boosting demand for stocks and sending the market soaring close to its highest level ever.
However, the QE boost can’t last forever. Sooner or later, market fundamentals have to take over.
Unfortunately, the fundamentals aren’t looking too good. Claims of an improving economy appear to be overblown, as corporate profits are underachieving. According to Bloomberg, for every public company that expects earnings to exceed expectations for the most recent quarter, 4.3 companies say profits will be below expectations.
That’s the highest degree of pessimist about earnings since February 2009 and it matches the pessimism of October 2001 (just after 9/11).
Major corporations, such as FedEx Corp. (FDX) and Intel have lowered their profit expectations. FedEx, which is considered to provide a barometer for the economy as a whole, lowered its profit outlook because a weakening economy is prompting customers to switch to a lower cost means of delivery.
The first quarter for FedEx ended Aug. 31, 2012 and on Sept. 18 the company reported earnings of $1.45 per diluted share, compared with $1.46 a year ago.
Intel, which reports earnings on Tuesday, is seeing a drop because of a slowdown in sales of personal computers. Intel is the world’s larger manufacturer of computer chips for PCs.
Bloomberg reported, “Warnings that estimates are too high by companies from Intel Corp. to Caterpillar (CAT) Inc. came even after analysts lowered predictions for third-quarter income growth by 11 percentage points this year.”
Intel’s pessimism reflects an overall drop in technology stocks and cyclicals as a group.
Apple has led the technology sell off, with its stock breaking its 50 day moving average and approaching its 100 day moving average.
The cyclical sectors benefited most from quantitative easing and led the market higher. Now they appear to be leading the market lower.
It’s too bad that QE3 provides open-ended easing and will be ongoing for as long as The Fed sees fit. Otherwise, Chairman Ben Bernanke could hint at QE4 and give the market another boost. It seems that the anticipation of easing is more important to the market than actual easing.