For a while now, it has been the subject of some debate around the office whether the dearth of earnings and sales growth that we saw in the second quarter and are seeing in the third quarter is the beginning of the end. In other words, are the decline in earnings and revenues a forewarning of recession? Or, is it an earnings purification process as corporate America works through the effects of the decline in energy prices, slower growth abroad and the rise of the U.S. dollar?

As earnings season draws to a close, it appears that this will be the first time since the second and third quarter of 2009 that the Standard and Poor’s 500 index will have two consecutive quarters of year over year earnings contraction. It will also be the third quarter of revenue decreases according to FactSet’s data compilation. There are many extenuating explanations offered again this earnings season, warmer weather than usual affecting late summer and fall retail sales, a strong dollar restricting demand from abroad, the collapse of energy prices and, you name it.

The U.S. Bureau of Labor Statistics says that characteristics of a recession are “a general slowdown in economic activity, a downturn in the business cycle, a reduction in the amount of goods and services produced and sold” – sounding rather familiar? In the end, this begs the question, are we proceeding through a difficult but temporary period as companies adjust to an environment of a strong U.S. dollar and an energy free-fall? Or is this the beginning of a recessionary downturn? Will we actually see the improvement in corporate growth, which has now been pushed out to 2016? If we are just in the midst of growing pains, then excluding unforeseen circumstances, it would make sense that as the anniversary of the shock from the collapse of energy prices passes, year over year comparisons become easier and we see a positive trajectory again.

Day-to-day, we have seen that as economic data and corporate announcements come in, investors vacillate from optimism to pessimism resulting in quite a bit of volatility. There is the Federal Reserve trying to right the ship (U.S. economy) through monetary policy when that ship should have most likely sailed off a long time (years?) ago. Whether they raise rates or not in December is a subject of excruciating concern every time one of the Fed members makes a comment in the media or a positive employment number is released. The latest Wall Street Journal survey of economists published on November 12th found that about 92% of economists surveyed now “see a December lift-off” in the Fed Funds rate. The U.S. political landscape with its election posturing, bi-partisan tug-of-wars, anti-business regulations and anti-competitive corporate tax policies, could move forward, initiating more corporate friendly policies. Differentiating between protectionist policies versus regulatory and tax changes designed to improve our global competitiveness could be a step in the right direction.

Rather intertwined are the economic weaknesses abroad and global currency policies. Developed countries continue to strain for growth through expansionary policies that ultimately weaken their currencies versus the U.S. and dampen the attractiveness of our exports. Emerging market economies are struggling from commodity dependence, currency declines and political ideology. Brazil, Argentina and Russia to name a few, are in recession and China is looking at significantly slower growth following a period of super growth. According to FactSet, the combined companies in the S&P 500 generate approximately 12% of sales from Europe and about 10% from the Asia Pacific region, predominately China and Japan. By dividing the index into two groups, those that generate more than 50% of their sales abroad and those that generate less than 50% of their sales abroad, FactSet discovered a wide divergence in earnings and revenue results. The corporations with less international exposure had positive earnings growth of +4.8% versus a -10.6% decline for firms with greater exposure. For the index as a whole, the earnings decline was -2.2%. The same results held true for revenues. The S&P 500 companies’ revenue growth for the third quarter is estimated to have declined-3.7%, while those companies with greater than 50% of sales in the U.S. had a 1% increase and the group with more than half of their sales from abroad had a  -12.5%  sales contraction.

So, is this Purgatory? Well, it is rather murky lately. Corporate capital expenditures are not what you would expect to see in an expansion.  Businesses that forecast higher demand would most likely be more confident about investing in plant and equipment. Although unemployment has now fallen to 5%, the consumer, which makes up about 70% of GDP still appears hesitant. Is it a demographic change or technology-based change that has altered consumer buying habits? A switch from the malls (Macy’s, Nordstrom) to the on-line retailers (Amazon)? A greater amount of discretionary income funneled to restaurants, travel and home improvement? Or is there less disposable income available due to higher shelter expenses for renters and higher health care costs for most of us – versus the offset of lower gas prices?

As these issues evolve, at Alhambra, we are constantly re-assessing the portfolio positioning and characteristics of client portfolios. We are comfortable with the more conservative asset allocation strategies that we initiated starting around a year ago. Recently, the anticipation of a rate hike has had a negative effect on most financial instruments and as always, we remind investors to keep their eyes on their long-term investment goals and objectives.

November 13, 2015

Margarita V. Fernandez

Vice President – Alhambra Investment Partners, LLC

“Wealth preservation and accumulation through thoughtful investing.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Margie Fernandez can be reached at:

305-233-3774

MFernandez@4kb.d43.myftpupload.com