Hot Charts

by Clement Gignac, Chief Economist
7/22/2008
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U.S. Watch

Capital markets are increasingly sophisticated but it seems that human nature still has not changed over the years. Indeed, when good times are rolling, investors get excited and sell-side analysts are kept busy revising upward their earnings estimate and target price. But, when business cycles happen, investors become anxious and disturbed by the bad news and downward earnings revisions from sell-side analysts. Should investors wait for earnings to reach their trough before jumping back in equities? Well, using history as a guide, it seems that investors will miss a significant portion of the rally if they wait for earnings to get better. Indeed, as illustrated by today’s Hot Chart, the S&P 500 index usually rebounds 4 to 8 months, with an average return of 27.7% return, before the earnings trough is reached. In the 1991 recession episode, the market trough occurred 14 months before the earnings trough, offering a whopping 37.2% return for investors who had the stomach to deal with the earnings decline in the interim.

Bottom-line:

As mentioned in our Strategy Viewpoint published this morning, we have not given up on our U.S. consumer-led recession scenario but both U.S. corporate bonds and stocks have already factored in a lot of bad news. After being tagged as faithful member of the bearish camp, it is time to take-off our grizzly-bear jacket and search for buying opportunities since exuberance is over. The U.S. economy faces hardship and North American equities are not out of the woods yet but value is definitely starting to emerge.

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