The Earnings Engine that Could
With roughly 65% of S&P 500 companies having now reported their Q2 results, the verdict is nearly in and earnings season hasn’t been as terrible as feared. It certainly hasn’t set record highs, but on balance, it hasn’t been nearly as painful as markets suggested it could be during the quarter.
As of this writing, 77% of companies that reported have beat earnings estimates. That’s in-line with the 5-year average, although the average earnings surprise has been only +5.4% vs. the 5-year average of +8.8%. Revenues were more positive (note: inflation helps revenue numbers because as prices rise, so does the top line) with an average surprise of +2.5% vs. the 5-year average of +1.8%.
Related: Income investing strategies
Markets have responded with a ringing endorsement so far, with the S&P up nearly 8% since the week of July 11 when earnings season really kicked off.
Do you feel the “but” coming? Here it is: But looking only at these numbers can create a false sense of optimism that corporations are, and will be, able to weather the inflation storm with limited damage. The reality is, this environment is challenging for most businesses and we likely haven’t seen the end of downward revisions.
Turning Down the Torque
Even if downward earnings revisions continue, it’s important to note that we entered this slowdown with record high profit margins, meaning companies had more of a buffer to work with than in prior cycles.
In the prior four recessions, earnings have seen an average peak-to-trough contraction of roughly 40%, which is a far cry from what we’re seeing now. This could mean we aren’t headed for the classic recession scenario, or we just haven’t seen it yet. After all, the double dip recession in the early 80s saw an earnings contraction of just 4.6% in 1980, but the second dip brought with it an earnings contraction of 19% in 1982.
So far, earnings expectations for 2022 are only 1.0% off their highs, and 2023 estimates are only 2.4% off theirs. I still think it’s reasonable to see a 5% reduction in earnings estimates for the remainder of this year, and somewhere between 5-10% shaved off of 2023 expectations before we ring in the new year.
Those revisions could bring with them more negative headlines about consumer spending shifts, reductions in headcount, or a variety of other capital preservation moves by companies while they protect their bottom line.
The saving grace is earnings don’t usually trough until the end of the recession or after the recession is over. This means we may continue to hear about downward revisions until well after the market has bottomed and the worst is behind us. The moral of the story is, don’t use earnings revisions as a market timing mechanism.
Revving the Ratios
Mathematically, since the S&P 500 index has risen and earnings estimates have come down, the price-to-earnings multiple has increased from 15.8x on June 30 to 17.1x today. That feels a bit high to me given where inflation is and my expectation that the Fed is still hiking for the foreseeable future.
That means I won’t be surprised if we give some of this recent rally back in August, but I would view those dips as buying opportunities. I still believe the second half of 2022 can bring upside opportunities in equities as the economic data continues to cool and the Fed slows down its hiking cycle.
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Recession is unofficially here. How to survive & thrive
Gross domestic product (GDP) – a broad measure of the price of goods and services – decreased at an annual rate of 0.9% in the second quarter according to an announcement Thursday by the commerce department. That’s after falling at an annual rate of 1.6% in the first three months.
That could mark what some economists consider the unofficial start of a new recession.
While the United States’ most recent recession lasted just two months, ending in April 2020, current soaring gas prices, Russia’s war on Ukraine, and rising inflation have led some experts to predict the U.S. could slide into a recession as early as this summer.
This post will help you prepare for a higher chance of unemployment, investment losses and general financial instability, help you if you are living paycheck-to-paycheck, and have trouble paying your bills.
Rules for weathering a recession are good to follow no matter the economy, and come down to these points: Spend less, save, and earn more.
Here I am on WCCO CBS News giving these tips.
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The definition of a recession is a downturn in the economy. On a broader scale, this means that businesses lose money and industry produces less product for two quarters — or six months — in a row.
What does a recession mean for everyday people? Recessions are typically marked by:
- High unemployment rate
- Wages that do not go up
- Lower housing prices
- Downturn in stock market equities and other investments
Here’s all the things you can do right now for a recession.
Related: Inflation — pro tips for protecting your money
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Money impacts nearly every part of our lives. When we’re stressed about finances, our families, our relationships, and even our physical wellbeing suffers. If you get on top of your finances before a recession, you can maintain power over your life. This includes:
- Budget
- Savings + investing plan
- Goals for earning more
Read: 9 ways single moms can make money and build wealth in 2022
Michael Krinke
If you want to achieve and maintain financial stability, spending frugally is a big part of the equation. Start by tracking your usual expenses, then figure out where you can cut spending. Commit to meal planning instead of dining out, cancel recurring subscriptions you no longer use, and curb unnecessary shopping.
Read: 7 easy steps to set up a budget (from a single mom of 2)
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A 2019 Federal Reserve report found that about 40 percent of Americans wouldn’t be able to cover an unexpected $400 expense. If you don’t have one, start an emergency fund so you have extra money even if you are laid off.
A stash of $1,000 is a good place to start, and aim for at least three months’ regular income.
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Why let your unused stuff sit in a closet when you could turn it into money? Learn more about selling through pawnbrokers and consignment shops, and sell your gold, diamonds, jewelry and silver online.
Gold, diamond and silver prices have been at record highs this year, with gold topping $2,000 in March for only the second time in 50 years. CashforGoldUSA.com is our No. 1 recommendation for selling gold, silver, diamonds, pearls, coins, flatware and other precious metals and gemstones.
If you want to downsize to save money, you can also sell your house for cash.
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If you lose your job during a recession (or any time), it pays — literally — to have a side gig or backup job for an additional stream of income.
Check out our lists of best at-home career-level jobs, best high-paying jobs that do not require a degree, and 10 business ideas for moms.
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If you have debt from credit cards, student loans, or other expenses, consider consolidating your balances onto a 0% balance transfer credit card or obtaining a low-interest personal loan to pay them down.
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During a recession, there’s a greater risk that you could lose your job. That’s why it’s not smart to make major purchases or accumulate new debt you might not be able to pay off.
Instead, repair appliances and your vehicle, and attempt DIY home projects over financing new ones.
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The very best way to build financial security is to make sure you have a job. Here is our list of best at-home, high-paying careers, which includes recession-friendly skills like:
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Devise a plan for what you’ll do and where you’ll go if you lose your job or find yourself without a place to live.
Here is our list of government and other resources for low-income families:
- Help for single moms: 16+ resources
- Free laptops
- Free car
- Free smartphone
- Free Wi-Fi
- Free formula
- Free toys
- Free gas
- Free preschool
- Free prescription glasses
- 9 ways to get free money instantly
- $500 monthly single mom grant
- Scholarships for single moms
- Free Christmas gifts
- Best jobs moms can do from home
Shore up your friendships and other social networks that can help you find work, resources, and share ideas for weathering the storm — not to mention get together and have fun!
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We are not currently in a recession; however, the risk of recession has grown in the wake of Russia’s war on Ukraine, with rising gas prices and the Federal Reserve’s attempts to combat inflation by increasing interest rates.
The National Bureau of Economic Research Business Cycle Dating Committee announced that the 128-month expansion (the longest in U.S. economic history) ended in February 2020.
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The jury is out on whether we are heading into a recession amid the conflict in Ukraine, though some experts predict a recession as soon as this summer.
Goldman Sachs in October estimated the U.S. economy grew 5.6% last year, but will slow to 4% in 2022, a slowing that contributes to Deutsche Bank strategist Jim Reid’s prediction of the next recession hitting in 2025, according to Yahoo! Finance.
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- Businesses cut back spending in an effort to increase or maintain profits.
- Hiring stops or slows, raises and bonuses are tightened.
- Individuals, worried about their jobs and investments, spend less on everything from food to new homes, cars, and discretionary items like travel, gifts, home furnishings, electronics and clothing.
- Governments have less tax revenue to invest in their communities.
- The stock market, government debt, and home prices all continue to suffer under these economic pressures.
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In general, during a recession there is less economic activity. Typically, the financial pinch follows the following flow when the stock market tanks and home prices dip.
A depression is a severe and prolonged downturn in economic activity, typically defined as lasting three or more years and/or a decline in real gross domestic product (GDP) of at least 10%.
An economic depression is characterized by:
- High unemployment rate
- Low inflation — or even deflation (when the price of items goes down)
- Bear market for stock market
- Credit defaults for individuals, companies and governments
- Bankruptcies
- Less available credit
- The affluent tend to save more during a depression
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While inflation does not directly cause a recession, steps taken to combat inflation can lead to a recession.
Inflation is a measure of the rising cost of goods in the economy, and it is often fueled by high production costs and increased product demand. When inflation surges too quickly, the Federal Reserve might hike interest rates to slow buyer demand.
As spending decreases following a rate hike, companies respond by dropping prices and slowing production, which could lead to layoffs or salary reductions. This decline in economic activity over several months is known as a recession.
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A recession is part of a natural, healthy cycle of an economy. Some human behavior shows improvement, including:
- People tend to save more money during a recession.
- People shop less during a recession — which is good for the environment.
- Interest rates are cut, which is great if you need to borrow money, including for a mortgage.
- Floundering businesses close, which means that stronger businesses are more likely to thrive.
- There are many financial opportunities from lower prices overall — including the opportunity to buy stocks, real estate and businesses at discounted prices.
Related: The shocking ways money problems can affect your health
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Of course, there are negative effects of a recession, the most common being:
- Higher unemployment rates
- Lower wages and salaries
- Decreased home and stock prices
- Increased government spending
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Rich people love recessions since they are great opportunities to buy low and sell high, take advantage of a stressed job market and otherwise make coin. Here is what you can do.
Buy low, sell high — investing 101. Whether you are in the market to buy a house, or have cash to invest in the stock market, a recession is an excellent opportunity to buy now, and profit later. The key is to hold on to your investment until the market improves.
Kiplinger recommends these stocks during a recession:
- Walmart
- Dollar General
- PepsiCo
- Hershey
- Lockheed Martin
- O’Reilly Automotive
- Diageo
- Philips Morris
- Church & Dwight
- General Mills
- Unilever
- Clorox
- Proctor & Gamble
- Hormel
- Costco
- Kroger
- McDonald’s
- Rollins
- Service Corp. International
- H&R Block
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Most investors get scared when the stock market goes down, and quickly sell. This is 100% the worst thing to do. If you have investments in the market, sit tight. If you have cash on hand, invest now that stocks are at a discount, and profit when the market returns.
Learn about investing in a 401(k), IRA, through a robo-advisor or brokerage: How to start investing.
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When the economy is down, home prices drop, and interest rates also go down. This is a great opportunity to buy up real estate — whether for your primary residence, a second, vacation home, rental investment or an Airbnb property.
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Gold prices have historically risen during recessions. Gold has been considered a safe investment, and often climbs when stock markets fall. If you have old gold jewelry, gold coins or other gold items that you no longer enjoy, consider selling them for cash.
When you look at gold vs. inflation, gold is a low-risk long-term investment against inflation. Learn more about buying and selling your gold jewelry, coin and other items, as well as today’s gold price in this post.
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It is always great to have cash on hand, at least a three-month emergency fund. Low interest rates on savings and money-market accounts during recessions mean that big stores of cash may be unattractive compared with other tools.
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Recessions can be financial bonanzas for some people — mostly the rich. Opportunities during an economy downturn include:
- Buy low in the stock market
- Home buyers and real estate investors looking to purchase a house — especially first-time home buyers who benefit from low interest rates
- Those looking to refinance debt, including a mortgage, student loans, car payments and credit cards
- Employers who benefit from a large pool of people looking for jobs
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Stockpiling items in a recession is a good way to save money in the long run. In general, these are some items to stockpile in the event of an economic downturn:
- Canned goods like fruits, veggies, beans, soups, broths, and meats
- Foods that can be frozen like meat and breads
- Dry goods like rice, noodles, pasta, rolled oats, and seeds (kept in a cool, dry place)
- Baking supplies like honey, flour, sugar, vanilla
- Nut butters
- Spices
- Oils
- Paper products
- Water
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In general, here are some no-nos (but common mistakes) during a recession:
- Liquidate all your investments
- Withdraw from your 401(k) or other retirement accounts
- Co-sign for a loan or otherwise take on more debt than you have to
- Avoid taking too many career risks
- Business owners should avoid capital investments now
If you still have a job, here’s what you should do right now:
- Start an emergency fund
- Cut back on spending and pay down debt
- Sell unwanted and unused items to make extra money
- Consider starting a side gig for extra income
- Store food and water to save in the long term
If you have lost your job and don’t have a financial cushion, here is what you can do now:
- Focus on the basics: Rent, utilities, food and frugal living. Apply immediately for unemployment and other public programs. A budget is critical.
- Sell things you don’t need. Gold and jewelry, cars you can do without, clothes and appliances. You could also use consignment shops or pawn shops to get quick cash.
- Maintain your credit score — a low score means higher interest rates and digging yourself deeper in debt. Take steps to improve your credit: How to build your credit fast
- While you look for work, keep your skills current with an at-home side gig, or take online courses. Read: Best jobs for moms
- Take advantage of all the resources available and apply for my Single Mom Grant.
This article originally appeared on WealthySingleMommy.com and was syndicated by MediaFeed.org.
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