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“October Surprise” Is not About Elections This Year but Corporate Earnings

November 6, 2012

Driven by overseas revenue, corporate earnings delivered year-over-year growth for 11 consecutive quarters to reach all-time highs. But third quarter 2012 reports thus far have put that winning streak in jeopardy.
-Douglas Cote, chief market strategist, ING

 
·       Driven by overseas revenue, corporate earnings delivered year-over-year growth for 11 consecutive quarters to reach all-time highs. But third quarter 2012 reports thus far have put that winning streak in jeopardy. “October surprise” is political jargon for an unexpected event that influences the outcome of an election. This year, however, it could be equity markets that are whipsawed by a transformative development, as declining corporate earnings could change the direction of the equity market.
 ·       With November 6 fast-approaching, the media’s attention has been focused on the race for president; however, they may be missing the real action — the balance of power in Congress. Though the Republicans are likely to maintain control of the House, the Senate is up for grabs. A Democrat victory in the Senate will mean another divided Congress that may once again descend into partisan bickering with little or nothing to show for it. If the sun shines on the Republicans, however, the GOP will control Congress and be able to usher through their legislative favorites.
 ·       Superficially, the parties advocate very different views on spending and taxation; however, it is not clear that either philosophy has what it takes to rekindle the growth fires that would overcome our fiscal dilemma. Austerity alone is not enough, and higher taxes suffocate the incentive for businesses to grow and for consumers to spend. In any event, it is increasingly obvious that monetary stimulus is both inadequate and unsustainable.
·       Fed Chairman Bernanke’s dedication to achieving full employment is admirable, but the markets increasingly aren’t buying it. Clearly, monetary stimulus alone cannot revive the economy, and his dovish policies are giving Congress an excuse not to take action. Stimulus has been very effective in stabilizing markets, aiding housing and buoying the consumer, but it is time to take the monetary punch bowl away to get a sober look at reality.

 

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