When the Federal Reserve first cut rates on Jan. 3, many investors surmised that a rebound in economic growth was in the offing. With many forecasters reckoning on a V-shaped recovery, it seemed like a good idea to start clearing out of the drug stocks and buying cyclical areas, like retailers and capital goods makers, that would see earnings growth reaccelerate. Drug stocks fell sharply, and, even though the rally in cyclical has faded, they continue to perform poorly. 2001 figures estimated. Meanwhile, with both income and wealth under pressure, the consumer looks to be on shaky ground.
Many economists now expect the economy to remain mired until at least the third quarter.
And where the economy goes, so go U.S. corporate earnings. We've got a way to go here. That's going to be true at least for this year and possibly into next year. J.P. Morgan Chase's equity strategy group has also found an inverse relationship between industrial commodity prices and drug stock performance, which makes sense when you consider that rising commodity prices signal a rebound in the economy. Commodity prices are still falling.