In my 06/06/16 podcast, we talked about the jobs report and how the number was pretty weak. But the jobs report does not always correlated with the direction of the economy. When we look at other metrics, one that is a bit concerning is that we've been experiencing an “earnings recession." This is a term that's been thrown around in the media a lot lately.
So what is an earnings recession?
It is defined as two consecutive quarters during which S&P 500 earnings decline year-over-year. With this definition, the current earnings recession began in Q3 2015 and is still ongoing. We are in the third consecutive quarter of year-over-year earnings declines. This does not mean that the world is coming to an end. It doesn't even mean the recent rally in the stock market will necessarily end.
The market is experiencing an earnings recession going on three quarters. It's coming from the energy and materials sectors, which are minor parts of the market on both an absolute basis and relative history. Financial and consumer sectors are only into their first-quarter of declining year-over-year earnings, and the remaining six sectors are still showing earnings per share growth.
More importantly, there is a history for this sort of thing and it does not mean we are going to have an ugly outcome. There have been 12 earnings recessions since 1954, and 3 of them did not accompany an actual recession.
When it occurred in 1985 – 86, for example, it caused by a sudden drop in oil prices. Sound familiar? And it occurred in the midst of a period of economic expansion.
So while people point to the jobs report as an indicator of a potential recession, it's better to look at the earnings of companies. The trend is not good right now, but what we need to continue to look for is to see if the decline in earnings bleeds over into other sectors.
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Date Posted: 06/08/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.