MarksJarvis: 3rd-quarter earnings results may hold clues for companies

Paralysis in D.C. has disrupted some activities, but if level heads in government prevail, businesses can weather short-term interruptions without serious problems, analysts say

As companies begin reporting earnings for the third quarter, investors should start gleaning from chief executives' comments whether political antics over the nation's debt ceiling and budget will actually interfere with company profits in the weeks ahead.

Since the government's partial shutdown began last week, analysts have expected only a minor impact from the debt squabble. They have considered the shutdown a temporary drag on consumer confidence as individuals have waited for politicians get their act together in time to avoid missing payments on the government's debts.

Capitol paralysis has disrupted some business activities that depend on government approvals and payments. Yet, with the stock market down only about 4 percent since the Sept. 18 record, the drama generally has been considered an aggravation and embarrassment for the U.S. on the global stage, rather than a serious long-term impediment to business activity.

Craig Alexander, economist at TD Economics, noted that, if resolved quickly, the shutdown could provide a burst of spending when it ends and government employees get paid for time away from their jobs. He noted that after the 28-day shutdown in late 1995 and early 1996, output gained 7.2 percent the next quarter, probably the result of people with money to spend again after a lean period.

Prominent bond investment figure Mohamed El-Erian, of Pimco, warned Tuesday in an interview with Bloomberg TV that missing payments to debtholders could be more serious for the economy than the Lehman Brothers collapse in 2008. And the International Monetary Fund warned that failing to raise the debt ceiling in a timely manner could seriously damage an already fragile global economy.

But if level heads prevail in the nation's capital and the country pays its debts, analysts say, businesses can get through the short-term interruptions without serious problems.

"Relax a little," James Paulsen, chief investment strategist at Wells Capital Management, says to people fretting about the political mess. "For more than 200 years, the cumulative actions of millions of independent economic agents have been able to find solutions to seemingly overwhelming economic problems often made worse by government missteps."

As third-quarter earnings reports are delivered, chief executives' comments are expected to be far less focused on U.S. politics than whether companies see sales improving in Europe, China and other emerging markets.

Many of the largest U.S. companies depend on foreign markets for almost half their sales. And analysts are predicting that corporate leaders will provide reports during the next few weeks that confirm that Europe is pulling out of its recession and that China's growth isn't slowing at the alarming pace feared earlier this year.

For this year, sales growth in the U.S. has been anemic. It grew just 1.7 percent in the second quarter and is expected to be only 2.6 percent in the third quarter, according to FactSet.

As world trade stalled during the past few months, analysts lowered expectations considerably for earnings among energy stocks, basic materials and technology for the third quarter. Earnings for the Standard & Poor's 500 are expected to grow 3 percent.

China has been the dominant buyer of many materials ranging from iron ore to copper and nickel, so its slowdown along with other emerging markets has been a particular drag on commodity companies. But FactSet analyst John Butters notes that since the beginning of the third quarter, analysts have cut expectations for growth in all 10 sectors of the economy, from financial companies to consumer companies such as Safeway, Avon Products, Archer Daniels Midland, Estee Lauder and Amazon.

Nike recently reported higher revenue in all geographic areas except China and said Europe led the way with growth acceleration, Butters noted. Yet, companies ranging from Darden to ConAgra and FedEx "have talked about cost cutting," he said.

"Keep an eye on that," said Butters. "Analysts have fairly lofty expectations for growth during the next several quarters." The consensus for the current quarter is a lofty 10 percent gain in earnings.

Yet, the International Monetary Fund on Tuesday lowered growth expectations for the global economy, to 2.9 percent for this year and 3.6 percent for next year, and ratcheted back expectations for a broad range of countries — from the U.S. to China, Mexico, Brazil and India. For this year, it is expecting the U.S. economy to grow 2.6 percent.

Typically, if companies produce profits that are lower than analysts are predicting, investors will sell stocks.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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