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Tuesday, August 6, 2013

We have entered the seasonally quiet period in the market, with low volumes and typically directionless trading patterns. With the Q2 earnings season now largely behind us and nothing major on the economic calendar, the market simply doesn’t have the fuel to push it in any direction. This will continue through the end of August when the next set of jobs data will arrive ahead of the Fed’s mid-September meeting. Be mindful, however, that low volumes could exaggerate volatility in the short run.
 
It has been fairly uneventful on the earnings and economy fronts in the first half of the year. The Q2 earnings season was particularly underwhelming, with Finance as the only sector showing any sign of earnings momentum. Housing, commercial aviation, and autos showed signs of life as well, but they are small fry in the broader earnings story. The reality on the earnings front is that growth in the aggregate has turned negative outside of Finance. The market’s strong year-to-date momentum doesn’t seem in-sync with this earnings performance, but investors remain optimistic about the earnings picture going forward.
 
Estimates for Q3 have started coming down sharply, pushing the long hoped-for earnings growth ramp into Q4 and next year. This has been the prevailing trend for the last many quarters, with investors enduring current weakness in hopes of strength down the road. The Fed was always around to lend a helping hand. But we may be heading towards a period of turbulence from next month onwards as the Fed moves towards changing its programs at a time of leadership change. The current quiet period may or may not be the lull before the fall storm, but we should enjoy it while it lasts.

Sheraz Mian
Director of Research

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