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Will the government shutdown hurt your investment portfolio? Will the government shutdown hurt your investment portfolio?
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If you're following the headlines, you'll know that the prospect of a longer-than-expected government shutdown is making financial markets uneasy at best and turbulent at worst.If you're following the headlines, you'll know that the prospect of a longer-than-expected government shutdown is making financial markets uneasy at best and turbulent at worst.
Without a crystal ball, it's hard to predict what kind of toll the shutdown will take on investments.Without a crystal ball, it's hard to predict what kind of toll the shutdown will take on investments.
That's why you'll need to tear your attention away from the Washington melodrama and pay keen attention to what companies say about earnings and outlook when the third-quarter "reporting season" kicks into full gear next week. The market chatter surrounding those announcements will be full of the usual Wall Street jargon about beats, misses, guidance and visibility.That's why you'll need to tear your attention away from the Washington melodrama and pay keen attention to what companies say about earnings and outlook when the third-quarter "reporting season" kicks into full gear next week. The market chatter surrounding those announcements will be full of the usual Wall Street jargon about beats, misses, guidance and visibility.
Here's what you need to know: the 2013 stock market rally has pushed the S&P 500 index up 18.1% so far, even though corporate profits are growing at less than a third of that pace. If corporate profits are really flagging, the consequences for individual stocks – or the market as a whole – could be … uncomfortable.Here's what you need to know: the 2013 stock market rally has pushed the S&P 500 index up 18.1% so far, even though corporate profits are growing at less than a third of that pace. If corporate profits are really flagging, the consequences for individual stocks – or the market as a whole – could be … uncomfortable.
That makes this earnings season a great opportunity to examine your investments. Here's a primer.That makes this earnings season a great opportunity to examine your investments. Here's a primer.
Beat or miss?Beat or miss?
In any earnings season, the key question is whether a company pulled off an earnings "beat" or delivered a "miss".In any earnings season, the key question is whether a company pulled off an earnings "beat" or delivered a "miss".
In plain English, that boils down to whether the company's profits for the quarter were better than analysts anticipated, or whether they fell short of the mark.In plain English, that boils down to whether the company's profits for the quarter were better than analysts anticipated, or whether they fell short of the mark.
Companies usually manage this delicate dance by hinting their earnings might be lower, so that the markets are pleasantly surprised when they do better. That's a "beat".Companies usually manage this delicate dance by hinting their earnings might be lower, so that the markets are pleasantly surprised when they do better. That's a "beat".
Over the last four quarters, two-thirds of S&P 500 companies have beaten expectations, notes Greg Harrison, senior research analyst at Thomson Reuters and one of a handful of folks on Wall Street whose task it is to monitor this information.Over the last four quarters, two-thirds of S&P 500 companies have beaten expectations, notes Greg Harrison, senior research analyst at Thomson Reuters and one of a handful of folks on Wall Street whose task it is to monitor this information.
But not all "beats" are created equal. "If a company reports a smaller loss than expected, that is technically a beat, but it's hardly a good thing," says Harrison.But not all "beats" are created equal. "If a company reports a smaller loss than expected, that is technically a beat, but it's hardly a good thing," says Harrison.
Positive surprisesPositive surprises
A good "positive surprise" is one that represents a big gain over last year's results, Harrison says.A good "positive surprise" is one that represents a big gain over last year's results, Harrison says.
Of late, he's noted that these positive surprises have been slightly smaller, in percentage terms, than they have been historically. They're also coming only after analysts have lowered their expectations in the weeks and months leading up to the quarterly announcement.Of late, he's noted that these positive surprises have been slightly smaller, in percentage terms, than they have been historically. They're also coming only after analysts have lowered their expectations in the weeks and months leading up to the quarterly announcement.
Sometimes companies attempt to use a positive surprise – even if it's below the original forecast – as a deliberate strategy to generate a big 'pop' in their stock price. But when many companies do this, it's less likely that gamesmanship is to blame; that surprise might not be so positive.Sometimes companies attempt to use a positive surprise – even if it's below the original forecast – as a deliberate strategy to generate a big 'pop' in their stock price. But when many companies do this, it's less likely that gamesmanship is to blame; that surprise might not be so positive.
It may be a sign worth worrying about: that companies' or analysts' initial forecasts were too optimistic, overestimating the ability to turn in good profits.It may be a sign worth worrying about: that companies' or analysts' initial forecasts were too optimistic, overestimating the ability to turn in good profits.
Already, the outlook isn't great, as measured by corporate "pre-announcements", or early warnings by companies that their earnings won't measure up. "It's very negative; the second-most negative rate we have seen in the last ten years," says Harrison.Already, the outlook isn't great, as measured by corporate "pre-announcements", or early warnings by companies that their earnings won't measure up. "It's very negative; the second-most negative rate we have seen in the last ten years," says Harrison.
Why earnings have to growWhy earnings have to grow
That's significant because economists predicted early this year that earnings growth would be sluggish in the first six months of 2013, but that they would rebound in the second half. Things should be picking up by now.That's significant because economists predicted early this year that earnings growth would be sluggish in the first six months of 2013, but that they would rebound in the second half. Things should be picking up by now.
If earnings growth stalls at its current level, however, investors could get skittish. Currently, Thomson Reuters predicts that third-quarter profits will grow 4.6% over last year's levels. Odds are that the actual figure will fall short of forecasts made back in January.If earnings growth stalls at its current level, however, investors could get skittish. Currently, Thomson Reuters predicts that third-quarter profits will grow 4.6% over last year's levels. Odds are that the actual figure will fall short of forecasts made back in January.
What to watch forWhat to watch for
It's hard to trade around an individual company's earnings report, and most veterans suggest you leave that to the pros.It's hard to trade around an individual company's earnings report, and most veterans suggest you leave that to the pros.
This quarter, you'll want to keep a particularly keen eye on how earnings releases compare to analysts' estimates as well as to any guidance that companies offer up in their press releases.This quarter, you'll want to keep a particularly keen eye on how earnings releases compare to analysts' estimates as well as to any guidance that companies offer up in their press releases.
Are things changing?Are things changing?
It's more important than ever to keep an eye open for hints that companies are worried. Throughout a weak economic recovery, companies have managed to turn in strong results. If they're not doing well, it's a sign that the economy might get even worse. That's especially true in light of the shutdown, the tenuous economic recovery and the mediocre earnings growth at many companies so far this year.It's more important than ever to keep an eye open for hints that companies are worried. Throughout a weak economic recovery, companies have managed to turn in strong results. If they're not doing well, it's a sign that the economy might get even worse. That's especially true in light of the shutdown, the tenuous economic recovery and the mediocre earnings growth at many companies so far this year.
"It's harder than usual to get a sense of what will happen to earnings in the next quarter," says Harrison."It's harder than usual to get a sense of what will happen to earnings in the next quarter," says Harrison.
And watch that portfolio. Without clarity, or an obvious sign to justify the market's confidence in an earnings boost, the party may be ending. Some of the market's big gains may be in jeopardy.And watch that portfolio. Without clarity, or an obvious sign to justify the market's confidence in an earnings boost, the party may be ending. Some of the market's big gains may be in jeopardy.
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