Once upon a time, business cycles were predictable and the economy alternated between periods of expansion and contraction.  As a leading economic indicator, the stock market would predict the business cycle as investor confidence and consumer confidence ebbed and flowed. 

The Big Picture 

The changing seasons also heralded shifts in investor and consumer behavior.  Planting and harvesting schedules determined school attendance as well as market availability of perishable commodities.  Now, with globalization, the advent of industrial agriculture and changing consumption patterns, cycles and seasonal patterns are less reliable.  The one dependable seasonality is the earnings cycle – with companies reporting their quarterly results in January, April, July and October. 

The one predictable pre-earnings event is the adjustment of expectations heading into the reporting season, and this reporting season is no different.  From early optimistic expectations, fourth-quarter 2012 earnings estimates have been reduced to mid single-digit gains.  That leaves plenty of room for prices to rally when results beat these much lowered expectations. 

With major U.S. stock indices trading at five-year highs, some tempering of enthusiasm is to be expected, but it may be misplaced.  First, the rally off of the March, 2009 lows was never embraced by individual investors who were burned so badly in the financial collapse of 2008.  Many institutional investors let politics cloud their investing judgment, predicting financial Armageddon along with the end of the world. 

Having missed out due to fear or folly, money is now pouring back into equities.  The animal spirits – the Keynesian description of emotions influencing investor behavior and quantified by consumer confidence – are back with a vengeance.  Investors, tired of low interest rates that come with safety and preservation of capital in bonds, poured $18.3 billion into equities, according to Lipper’s report of January 9, 2013. 

Investors appear to either have tired of Washington’s game of chicken – having seen the fiscal cliff crisis morph into the debt ceiling debate that does nothing to confront the problems of ordinary citizens (lack of jobs and inadequate financial security) – or grown used to the fact that this is how business will be conducted as long as Obama is in the White House and Republicans control the House of Representatives. 

I, Investor 

With hysteria and histrionics on the back burner, earnings and data will move the markets and, as luck would have it, we have plenty of each to digest.  Results from the financial sector will dominate this week’s releases.  American Express, Bank of America, Capital One, Citibank, Goldman Sachs and JP Morgan Chase all release results this week.  General Electric, E-Bay and Intel earnings are also on the earnings docket this week. 

Data-wise, December retail sales, inflation on the wholesale level, November business sales and inventories along with January’s Empire State manufacturing index come out tomorrow.  Wednesday’s data dump includes December consumer inflation figures, industrial production and capacity utilization, real earnings and the Fed’s Beige Book. 

Thursday sees the weekly jobless claims series, December housing starts and January’s Philadelphia Federal Reserve’s report.  The week ends with the mid-January reading on consumer confidence from the University of Michigan. 

The following week is a holiday shortened one with the Martin Luther King Day holiday doubling as inauguration day.  The earnings parade kicks into high gear with airlines and tech bellwethers scheduled to release their fourth quarter results.  USAir, Delta, Southwest, CSX, Union Pacific, General Dynamics, Lockheed Martin, Apple, Microsoft, Ford, P&G and 3M are just some of the companies to watch. 

Existing and new home sales data are scheduled for release the week of January 21st, as is the leading economic indicators series for December. 

Right now, the momentum is on the side of the bulls.  The S&P is within 100 points of its all-time high; the Dow is less than 1,000 points away.  Expect a challenge of those highs before another sell-off and another cycle.

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