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The Securities and Exchange Commission (SEC) requires publicly traded companies to make quarterly disclosures about their financial performance. In a purely efficient market, these data would tell us all, at the same time, how these companies are doing, and we would decide to invest or not based on that performance.
It takes companies a few days to close their books and compile these documents, so about 10 days after the end of every quarter we start seeing earnings reports. Traditionally, Alcoa is the first company to release reports. In general the SEC requires large publicly traded companies to report within 40 days from the end of the quarter. That’s about six weeks, but in reality the release of these quarterly earnings statements is sort of on a bell-curve distribution. Most companies want to report earnings as quickly as they can. So from about Oct. 10 until about the end of the month, we were in earnings season. And the cycle repeats every three months.
But did anyone care? Earnings continued to slide, but the market continues to climb. Thompson Reuters says companies historically beat earnings expectations 63 percent of the time. But in the third quarter, earnings expectations were revised downward repeatedly, and the S&P 500 still failed to hit that 63 percent number. Another technical indicator—the “Negative to Positive Guidance Ratio”—tallies the forward-looking guidance made by S&P 500 companies. Historically, that number has been about 2.5, but it has been above that number every quarter since mid-2011. The most watched indicator, the price-to-earnings ratio, is about 20 for the S&P 500, significantly above the historical median of 14.5.
So will the markets continue to reward mediocrity? Even in a market made increasingly inefficient by government intervention, that’s unlikely. We always see, statisticians warn, a “reversion to the mean.” With the budget crisis behind us, earnings should matter more than they have in the recent past. That said, so long as the government continues to pump $85 billion into the markets each month, indicators such as earnings and revenue—which should determine stock prices—will continue to have a muted effect. Which is another way of saying: Welcome to the new abnormal.
Doing good and doing best
Back in 2009 we told you about the Eventide Gilead Fund as part of our coverage on Biblically Responsible Investing (“Investing by the Book,” Aug. 14, 2009). The fund was new and small, but showed promise.
Much of that promise has come to pass. On Oct. 18 The New York Times ranked the Eventide Gilead Fund the best-performing mutual fund with over $50 million in assets for the five-year period ending Sept. 30, 2013. As of that date, the fund totaled $187.6 million in assets under management (though it has jumped dramatically on news of its performance) and had generated a five-year annualized return of 21.31 percent compared with the S&P 500 Index return of 7.57 percent.
Will this strong performance continue? That’s impossible to say. When funds get larger, they tend to become more diverse, more conservative, and “revert to the mean” (see above). And Eventide is getting larger quickly. Since the Oct. 18 Times announcement, new assets have been pouring into the fund. Still, it’s hard to argue with Eventide’s performance so far. The fund makes a strong argument for Biblically Responsible Investing’s key tenet: It is possible both to do good and to do well. —W.C.S.