Not All Bad News Is Created Equal

April 23, 2019 - John Osbon (2 mins to read)

This week is a major earnings week. If you follow business news it’s quite likely you are going to hear the term “earnings recession” this week. If you do, please immediately remind yourself that an earnings recession is not the same thing as an economic recession. There’s no reason to panic over this R word. Let’s take a closer look at the details for a better perspective.

The other kind of recession

An earnings recession is defined as two consecutive quarters of year over year declines in total corporate profits. This is very different than an economic recession, which is two consecutive quarters of declining GDP. Two very different metrics. The economy can still expand when profits are down, and it often does.

So far, 25% of US companies have reported earnings. In the next two weeks we will be done with the majority of reports. If profits decline this quarter, we will need to wait another period to see whether it officially meets the two consecutive quarter standard. Either way, it is hardly worthy of headlines.

What goes around comes around

Most of the time an earnings recession is a slowdown in response to a previous stimulus. The stimulus this time was the tax cuts from last year. They provided a large boost to earnings that finally played itself out after one year. The pace of earnings growth was unsustainable and has come back down to Earth in the first quarter. Total earnings are expected to be down 4%. The second quarter is looking breakeven right now. Meanwhile, the economy continues to grow and few forecasters expect that to change in the next few months.

It has happened before

We went through an earnings recession in 2015-16. The cause that year was high oil prices and then their collapse. Oil companies had enormous profits and then losses. The stock market was the complete opposite story. The S&P 500 went from a bottom of 1900 to 2800 today.

Does one cause the other?

There have been six earnings recessions since 1987 but only two of them coincided with economic recessions. The link between the two is weak. Earnings recessions are poor predictors of economic recessions. If you invested regularly through those six earnings recessions you would have a lot more capital over time.

Our support for you

Our job is to pay attention to things like earnings recessions so you don’t have to worry about them. Big earnings declines make for great headlines and can scare people out of the habit of investing or even out of the markets altogether. But earnings recessions are a misleading indicator. Remember the broad economic positives: inflation is low, job growth is high, and GDP growth continues. As always, it’s our job to keep you informed and on a calm, consistent path through the ups and downs of investing.

Weekly Insights

delivered to your inbox


This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.

Weekly Articles by Osbon Capital Management: