Last week brought some mildly encouraging results for the first quarter earnings season, and the S&P 500 was able to close at a new all-time high for the index at 2,122. Before the 1Q earnings season started, consensus analyst earnings projections were for 5.8% lower results than for the previous quarter among members of the S&P 500. Fast forward to today and projections are for 0.2% earnings growth for the quarter. Not great, but better than previous expectations, and investors were happy to dodge the earnings bullet.
The week’s earnings results displayed the difficulty and challenge of individual stock picking. The pharmaceutical giant Activis rallied over 3% on Monday on the strength of an earnings and revenue surprise. Meanwhile, cloud storage provider Rackspace Hosting went in the opposite direction, falling over 13% as they announced projected sales below expectations. On Wednesday, Macy’s disappointed, and Kohl’s took a hit on Thursday, both the victim of weaker than projected sales.
We have long made it a practice to monitor the Dalbar Qualitative Analysis of Investor Behavior. The latest edition reveals that, on average, equity fund investors have consistently earned returns significantly below those posted by the S&P 500. The numbers are depressing, especially over the long term. A sampling: 5 year average annual (10.19% vs. 15.45%); 10 year (5.26% vs. 7.67%); 20 year (5.19% vs. 9.85%); and 30 year (3.79% vs. 11.06%). The reason for the underperformance? Bad investor decisions at critical points, such as during severe market declines and when the market surges.
We will have more to say about that in further editions. Suffice it to say that “Set it and forget it” is not a winning formula for most investors due to the emotional stress inherent in market cycles. As for now, we remain constructive on the equity markets as first quarter earnings were better than initially projected and economic data has softened a bit, which will likely mean that the Fed will continue with their current easy policy.