Time to Shift Back to Earnings

 | Jul 08, 2013 | 3:00 PM EDT
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An interesting thing happened last Friday. The market went up against a jobs report that really offered little to get excited about.

Sure, headlines called the jobs report better than expected, but if you looked closer, it wasn't pristine. The unemployment rate stayed the same -- a positive if it weren't for the fact that the actual labor force participation rate actually went up. Overall, it was good to see 195,000 jobs created. But this headline alone hides other variables, which still are quite high. One of variables still high is underemployment.

But Mr. Market cheered higher, no doubt to the positive headline number. I believe it was more than that. Mr. Market and many investors today have been conditioned to view that any economic setback will be saved by further stimulus from the Federal Reserve. After four years and three rounds of stimulus, you can't blame the human psyche for feeling that way.

The earnings season opens today and the general consensus is a weakening view. Should lower-than-expected earnings matter? Overall, yes. Value investors will want to capitalize on any price distortions created by earnings volatility; traders are interested in how to respond to any potential trend.

Will earnings matter is a different story. Hopefully, the Fed's comments about winding down QE3 as early as this fall will slowly condition the mind away from analyzing statements from the Fed to analyzing earnings statements. Perhaps the earnings won't matter much due to hopes that the Fed will come in to rescue and to move stocks higher.

Speaking of stock prices, the list of names at or near 52-week highs continues to swell: nearly 500 securities are trading at 52-week highs while fewer than 75 trade at 52-week lows. Sure, the enthusiasm for stocks can be attributed to an improvement in the general economy over the past four years. We all know, however, that the lion's share was aided by the helping hand of Uncle Sam.

The Fed needed to do what it has done, but the road to recovery with the Fed won't be fun. However, it has to start somewhere. Investor reaction to earnings will provide one signal of what perhaps is to come later this year.

I think it's safe to say that the next four years of stock market returns will have a difficult time matching the track record of the past four years. If housing and jobs continue to inch their way back up, stocks should remain a viable investment class -- provided investors pay sensible prices and focus on businesses with solid prospects.

Last week, Warren Buffett's Berkshire Hathaway (BRK.B) bought another block of DaVita Healthcare (DVA) at prices near a 52-week high and trading at a trailing price-to-earnings ratio of 27. Not necessarily a "value" play, but clearly it is to Berkshire. They are buying quality and, in their view, assets that will be worth more on down the road.

Whether the market decides, the focus should now be on news from the companies not news from the Fed.

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