The Bull Market Is About to Get Slaughtered
by Jason Simpkins, Outsider Club
The stock market has had a rough go of it these past few months.
And it’s only going to get worse.
Just take a look at this chart and you’ll see what I mean…
This is the S&P 500 over the past three months.
Does that look like a robust and confident market?
No, it looks like a market that’s topping out is what it looks like.
Indeed, a year from now, we may look back on that last new high reached in December as the stock market’s historic peak. Because it’s going to be tough sledding from here on out.
And if the Fed keeps its promise and raises rates, that’ll be an understatement.
Of course, you don’t have to take my word for it. Just look around, and it’s plain to see the wheels are coming off the bus.
An End to Earnings
What drives the stock market?
Earnings, plain and simple.
When the earnings are there — or at least appear to be — everything’s great. But when they’re not, there’s trouble.
And right now, they’re not there.
McDonalds, Mattel, Microsoft, Time Warner, Energizer, Ford, Procter & Gamble… All of these companies are staples. And they all missed earnings in the fourth quarter.
In fact, things have gotten so bad at McDonalds, CEO Don Thompson resigned earlier this week.
McDonalds’ management change followed a 7% drop in fourth-quarter sales. Profit dropped 21%, to $1.1 billion. Customer traffic at established locations in the U.S. fell 4.1% last year, following a 1.6% decline in 2013. And international sales have been burgled by the stronger dollar.
Indeed, the dollar’s depressing effect on U.S. companies is something of a running theme.
Procter & Gamble — whose brands include Pampers, Charmin, Crest, Tide, Nyquil, and Gillette — registered a bruising 31% drop in net income last quarter.
“Virtually every currency in the world devalued versus the U.S. dollar, with the Russian ruble leading the way,” President and CEO A.G. Lafley said in a statement.
Lafley says weaker foreign currencies will reduce full-year sales by 5% and net income by 12%. That comes out to at least $1.4 billion.
Battery-maker Energizer said currency weighed its sales down by $44.6 million last quarter.
DuPont, which generates 60% of its sales outside the United States, reported a 5% drop in revenue — 3% of which was attributable to foreign exchange rates.
And Pfizer expects the stronger dollar to siphon $2.8 billion off of its bottom line.
The High Cost of Cheap Oil
Low oil prices are another headwind. I’m not just talking about shale producers, either.
All around the world, oil companies are scaling back investment and laying off workers.
Royal Dutch Shell, for instance, is cutting $15 billion of investment over the next three years, after the company missed its fourth-quarter profit forecast. Shell posted a $3.3 billion profit, short of the estimated $4.1 billion.
ConocoPhillips reported its first quarterly loss since 2008. It, too, has announced spending cuts.
Jobs are at stake, too.
Last week, oilfield services provider Schlumberger laid off 9,000 employees. And Baker Hughes is laying off 7,000 as the number of oil rigs operating in the U.S. fell to its lowest level in two years.
In all, more than 30,000 dismissals have been announced across the oil industry.
More layoffs are coming. Then, dividends will be cut. And stock prices will plummet.
And here’s the thing: It’s not just oil.
With the dollar gaining strength, commodities are tumbling across the board.
Iron, steel, copper… all of it. It’s not just oil producers taking a hit here, it’s mining companies, too.
BHP Billiton and heavy equipment manufacturer Caterpillar have already been listed among casualties.
“In terms of the dollar, I think there’s more risk to a stronger dollar this year,” Caterpillar Chairman and CEO Doug Oberhelman told CNBC. “Commodity prices we’ve held pretty flat. Though they really in terms of copper folded up at the end of the year. I expect those prices to stay relatively soft until we see some kind of growth in the world somewhere.”
Again, these are huge multinational companies that are scaling back investment and cutting jobs. It’s only a matter of time before this impacts consumer spending, which will exacerbate the situation further.
Layoffs, weak exports, slashed dividends… Those are the chief ingredients of a bear market. And that’s exactly what we’re going to get.
No doubt, U.S. companies have been living high on the hog thanks to all the Fed’s stimulus. Now, they’re bloated, complacent, and overly-optimistic about the true condition of the global economy.
They’re ripe for slaughter. Don’t get caught up in the bloodbath.