Financial Market UpdateStrategicPoint of View®
April 12, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Positive economic news continued this past week as U.S retailers exceeded expectations, signaling that consumers are headed back to the malls. Inventories rose, providing hope that manufacturers are seeing steady demand for their products while stores are restocking shelves. On the negative side, new jobless claims took a step back and Greek debt woes continued, at least for the first part of the week. Bringing it all together, Ben Bernanke weighed in on the economic recovery by reflecting, in a speech in Dallas, that economic conditions would improve for the remainder of the year.
S&P 500: 1194 (up 1.36% for the week and up 7.09% on the year)
Dow: 10,997 (up 0.64% for the week and up 5.46% on the year)
NASDAQ: 2454 (up 2.16% for the week and up 8.15% on the year)
10-year: 3.89% (from 3.86% last week)
Crude Oil (May): $84.91 (from $84.87 last week)
Gold (May): $1,162 (from $1,126 last week)
USD/Euro: $1.3499 (from $1.3504 last week)
THIS WEEK
Markets have a lot to track and digest this coming week. Inflation, retail sales, industrial production, housing starts, consumer sentiment, jobless claims – almost all areas of concern will be touched upon.
COMMENTARY
Companies will start reporting first quarter earnings this week. It seems that we just leave quarterly profits behind and the next season begins. Why all the fuss? Much is riding on assumed profits this time round. We have had six weeks of steady market price increases that have baked in a real recovery. Analysts have been increasing their earnings estimates for months, trying to keep up with rising expectations.
Everyone agrees the data will be strong but how strong is the issue. Barron’s reported this week that Thomson Reuters is estimating profit growth of 37% for the S&P. This number is a year over year. It may not be necessary to remind everyone that first quarter 2009 was abysmal. However, reported numbers are not all that is being taken into consideration. Normally, 60% of companies beat estimates. Last quarter 5% growth was tacked on as company profits soared past estimates. This means the good news could keep flowing, warranting even higher returns.
Earnings reports determine earnings per share. Depending on how these come in (operating earnings of $75? $85? $95?), and how earnings are projected going forward, these numbers generate Price to Earnings Ratios (P/E), which are used by many people to determine if stocks are under priced, fairly valued or overpriced. Whether you are a believer in a V shaped recovery or a U shaped rebound, you might think a forward P/E of 15, 17 or 19 times earnings is a reasonable expectation. If you are a bear, you are looking at much lower entry points.
Strong earnings are not just good for the stock market – they are good for the economy, since profits create room for businesses to hire workers. Of course, numbers alone cannot dictate business decisions. Investors will be pouring over company guidance for confirmation that demand has increased and capital spending is on the rise. Businesses may not be entirely forthcoming, however, as they may want to hedge their bets. So tone of the guidance reports will be as important as the substance.
Right now many may not want to bet against a market that has risen dramatically for over the past year. Without the fear of looming bad news to turn off the spigot of exuberance, markets are likely to be headed higher. Add to the equation: the volatility index (the VIX), known as fear index, has fallen to lows not enjoyed since before the crisis.
A comfortable rising market and a reduction in fear can lead to too much complacency on the part of investors. Markets predictably overshoot; and that may happen again this time. So enjoy the ride, but don’t take your eyes off the road. We are probably overdue for a pullback, and have been for many months. But due dates mean little when it comes to market behavior.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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