China’s wavering stock market, Greece’s default crisis, and the US economy’s slow growth are just some of the issues that have been hitting the global economy since the beginning of the year. Even so, investors seem undeterred. Companies with higher risk factors are selling bonds, housing sales are booming in some bigger cities in the US, and even art is selling at an all-time high.
Numbness to Fear
It seems almost as if investors have developed an immunity to risk. So many near disasters were averted in the past decade that the perception of risk seems to have significantly changed. The aptly named fear index which measures the odds of big swings in stock prices is very close to an all time low, while the number of investors who bet that stocks will drop has been dwindling. The best measure might be the price of gold, something that has always done well in time of crisis as a safe haven, but even it has dropped over 40 percent in the last four years.
The main reason a lot of US companies have been reporting rising profits has not been good sales, but cost cutting. Despite slowing sales, they’ve managed to stay on top by trimming various expenses, something that can only be considered a temporary measure. Cutting costs only works for as long as there are costs that can be cut. There will come a point where that is no longer possible.
At the time, if companies cannot actually growth their sales, the bottom line will suffer. This can already be seen with some big companies such as United Technologies and Union Pacific whose stock fell after posting lackluster earnings for the past quarter. If nothing changes, this could lead into an earnings recession putting severe downward pressure on the market.
However, financial analysts seem to think that this fear is unfounded, especially with stocks in the S&P 500 index trading at 17.6 times their expected earnings for the next 12 months. If they are right, profits will finally start growing again this year and then increase by double-digits in the next, making sure an earnings recession is averted. IF they are right.