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Stocks Show a Fear of Judgment Day

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On Wall Street, vague feelings of optimism about the economy have given way to specific fears of judgment day. The S&P 500 lost 1.71 percent Tuesday alone, and is down 3.47 percent already in April. In the process, falling stock prices have dragged bond yields down, which has ominous implications for savings accounts.

Judgment day in this case is the day each publicly traded company has to report its first quarter 2012 results. The season for those earning reports is about to begin, and investors are concerned that these results may not live up to the expectations built in to stock prices. It's becoming the recurring theme of this economic recovery: Somehow, every momentary improvement never seems to quite deliver on expectations.

Great expectations

From Dec. 31, 2011 to March 31, 2012, the S&P 500 rose by an impressive 12 percent. However, bottom-up earnings estimates suggest that operating earnings for the quarter are going to be flat.

This isn't entirely unusual. Formal earnings estimates often don't keep up with changing outlooks for companies in the stock market. However, the pullback in prices suggest that expectations got too far ahead of what the actual earnings are likely to be. Investors are concerned that when judgment day comes, earnings won't be able to support stock prices.

Judgment day

In terms of earnings reports, the date of judgment day may vary for each individual company, but there is a season -- roughly over the next month -- in which first quarter results will begin to emerge. Quarterly reports should be somewhat routine, but with a persistently fragile economic recovery, they take on a pivotal feeling at this particular time. By the time earning season is over, two key questions will be answered:

Will macroeconomic developments translate into actual earnings growth? Recent months have seen a series of positive big-picture signals, from decent fourth-quarter GDP growth to encouraging employment results. The unanswered question is whether these broadly positive signs will translate into actual earnings momentum for U.S. companies. A somewhat disappointing March jobs report has cast a new shadow over the macroeconomic mood, and the initial look at first-quarter GDP won't be available until the end of this month.

What will be the ripple effects of a setback in stocks? As stock prices have fallen, they've pulled 10-year bond yields back below 2 percent. That's a discouraging sign for CDs, savings accounts and money market accounts. Deposit rates may not fall again because they never got the chance to rally, but don't expect them to rise if stock earnings disappoint.

There can be a fair amount of hype -- both positive and negative -- associated with stock price movements. However, as the release of earnings reports draws nearer, the whispers and the rumors tend to move closer to the truth. That's why the recent pullback in stocks seems so ominous -- it has the feel of harsh reality about it.

The original article can be found at Money-Rates.com: "Stocks show a fear of judgment day."