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Monthly Market Monitor - November 2009

Market Indices1October ChangeYear-to-Date (10/30/09)
S&P 500-2.0%14.7%
MSCI EAFE-1.3%23.9%
Dow Jones Industrial Average0.0%10.7%
Russell 2000-6.9%12.7%

Earnings Continue to Surprise to the Upside
While only about 40% of companies in the S&P 500 have reported earnings as of 10/30/09, the results so far have generally been positive. As outlined in the table below, slightly more than 78% of the companies that have reported Q3 earnings managed to post positive surprises (meaning that their reported earnings per share came in ahead of analysts’ forecasts). At the same time, only 13% failed to meet expectations. This suggests that analysts were overly pessimistic about Q3 earnings, much as they were in Q2. Nearly every sector in the S&P 500 came in ahead of expectations. However, the first column in the table indicates that despite the fact that many companies are exceeding expectations, the absolute level of earnings growth is weak at best. In fact, only two sectors (health care and consumer staples) managed to generate year-over-year earnings growth. The majority of industries actually reported declines. Some analysts caution that the positive surprises are generally stemming from cost cutting measures as opposed to revenue growth. At some point, companies will have to grow their top lines in order to grow EPS as cost cutting can only go so far. On a more positive note, Standard and Poor’s recently reported that analysts are forecasting EPS of $20.28 for the S&P 500 in 2010 versus an estimate of $16.58 for 2009.2 If these estimates prove to be accurate, it would translate into 22% earnings growth in 2010.

SectorQ3 '09 Growth %% Reporting Earnings% Positive Surprise% Negative Surprise% In-Line
Consumer Discretionary034.681.514.83.7
Consumer Staples0.93987.512.50
Health Care11.447.280416
Information Technology-13.248.7732.724.3
Telecomm Services-20.911.110000
S&P 500-6.839.878.413.18.5

Source: Ned Davis Research 10/30/09

GDP Growth Signals the End of the Recession
It may not be of much comfort to some people, but the recent GDP report indicates that the recession might officially be over. According to the Bureau of Economic Analysis, real GDP rose at an annual rate of 3.5% in the third quarter. This reverses the 0.7% decline in the second quarter. Although the 3.5% rise is only an initial estimate and will likely be modified somewhat once the BEA collects more data, the final number will be close to the initial estimate. The fact that GDP is once again growing is obviously a good sign, but some strategists are questioning the sustainability of such growth. Their argument rests on the fact that a large portion of the GDP growth stemmed either directly or indirectly from government spending. Two areas that contributed heavily to the GDP number were autos and housing. The government’s “cash for clunkers” program stimulated consumer demand for cars in the quarter. However, this program recently came to an end. In a similar fashion, the first-time homebuyer’s credit boosted demand for housing. This program is scheduled to end on 11/30/09, although there has been talk in Congress of extending it. A final contributor to the turnaround is the slow down in inventory liquidation. In the first two quarters of the year, many companies drastically reduced inventories to adjust to the difficult economic environment. This continued in the third quarter, but at a much slower pace. Eventually, demand from consumers and businesses must pick up to replace government spending as the primary driver of GDP growth. This will happen eventually, but the main question confronting investors today is the timing of this new demand.

  1. Wall Street Journal, 11/02/09
  2. Standard and Poor’s, 10/30/09

Prepared by:Cameron Lavey, MBA
Senior Investment Analyst
Research Department, ING Advisors Network

The views are those of Cameron Lavey, Senior Investment Analyst, Research Department/ING Advisors Network, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

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