Corporate earnings have held up well throughout these problems and we are hoping for more of the same. Earnings are close to all-time highs, and more important, stocks overall are trading at the lowest prices since prior to the great Bull market in August 1982. Even amid double-dip fears, many analysts predict that earnings are likely to be higher this year and again in 2012. It appears that the stock market is hardly sailing off the end of the world!
Many American companies, which have been accumulating cash while they wait for signs of a solid rebound, have some of the largest cash positions in their history, which should allow them to weather almost any storm. The Federal Reserve said that there was $2.05 trillion in cash and other liquid assets as of the end of June, the most since 1963, primarily due to better earnings and record profits in some recent quarters.
Recessions typically catch companies that are not as flush with cash. Tighter credit and declining revenues often deplete a company’s operating funds and prompt layoffs, which compound the economy’s pain and cause more uncertainty. That makes it even harder to get credit, further tightens cash availability and discourages companies from investing to take advantage of an eventual recovery. However, this time, “The cash should act as a shock absorber,” says John Lonski, chief economist at Moody’s Investors Service. “With more cash, companies would be less inclined to cut…capital expenditures and staff.” (Source: WSJ, October 5, 2011 – Companies $2 Trillion)
The U.S. economy is a highly complex and multifaceted mechanism. It is extremely difficult, if not impossible, to predict accurately, despite the fact that many economists make their predictions with great confidence. While third quarter earnings could potentially boost share prices, timing such a rally, if it does happen, is difficult indeed. Studies have shown over the years that investors typically pick the wrong time to sell and buy shares, especially when markets are so volatile. And another major problem is you have to get 3 things right: when to get out, when to get back in, and where to invest that money in the meantime.
When a recession occurs, it is because of a slowdown in economic activity. Mr. Yamarone of Bloomberg Publications equates this to someone riding a bicycle. “If you pedal too slowly, the bike will tip over,” he says. Although they share many similarities, no two recessions are exactly alike. They differ in terms of severity and duration. The magnitude of a recession is also influenced by the degree of the prior expansion. For example, the 2008 Great Recession followed the greatest credit bubble of all time. In fact, the bursting of the bubble was so severe that we lost over 8 million jobs and are still more than 6 million jobs short of fully recovering. As economic activity slows, businesses begin to reduce their labor force in order to become profitable. This decline may be sparked by a decrease in consumer spending, which comprises about two-thirds of the GDP. As demand slows, layoffs increase and unemployment rises. As the unemployment rate rises, there are fewer wage earners to support the economy and spending falls. As spending falls, businesses reduce their labor force . . . and the self perpetuation begins. Before the economy can recover, confidence must be restored.