This Rally Shouldn't Last

It’s that special time of the year, and we will all hear and read a great deal about Black Friday, Thanksgiving Weekend, and Cyber Monday during the next few days. Many pundits are going to make sweeping conclusions about the economy based on these very limited reports.

Our recommendation: please feel free to ignore this news. Christmas-time spending is a marathon, not a sprint. Slow sales early could be bad news, or it could just mean shoppers are waiting to pounce later; fast sales early could be good news, or it could mean consumers get tapped out sooner. Past patterns are no indication of this year’s results. Even more important: it’s not how much consumers are spending that matters, but how much the economy is producing, which is the ultimate source of future purchasing power.

Instead, focus on fundamentals, like monetary policy and corporate profits. It’s these fundamentals that determine the path of markets in the next year or so. And in that regard, the near future is flashing many warning signs.

With results in from 97% of S&P companies for the third quarter, according to FactSet, it looks like corporate profits are up only 2% from a year ago. We would not be surprised at all if the GDP report (due Wednesday morning) shows economy-wide corporate profits fell in Q3 and, given bottom-up earnings estimates so far, continue to decline in Q4.