Financial Market Update
StrategicPoint of View®
April 23, 2012
25% of the S&P have reported earnings. 81% have beaten expectations; 7% have reported in line earnings; and 12% have disappointed. Since earnings expectations had been lowered coming into the season, the high percentage of positive reports does not come as a surprise.
Retail sales rose 0.8%, building on a very strong 1% growth the previous month. But remaining data mostly disappointed: the home builders’ index, housing starts and existing home sales all were down; industrial production and capacity utilization were flat, while weekly jobless claims ticked up. Leading indicators were positive but fell from levels reported in February.
Overseas Brazil and India lowered interest rates to spur economic growth,
G-20 finance ministers met to discuss how to stimulate growth and reduce unemployment. And France held its first round of elections, with the Socialist candidate Francois Hollande collecting the most votes. A run off election will be held in two weeks.
S&P 500: 1,379 (up 0.66% for the week and up 9.71% on the year)
NASDAQ: 3000 (down 0.37% for the week and up 15.16% on the year)
Dow: 13,029 (up 1.39% for the week and up 6.64% on the year)
US Treasury 10 yr: 1.96% (from 1.99% last week)
Crude Oil (May): $103.61 (from $102.84 last week)
Gold (June): $1,644 (from $1,660 last week)
USD/Euro: $1.3080 (from $1.3078 last week)
Data include: Case-Shiller home prices, confidence and sentiment indices, new home sales and pending home sales, durable goods orders and GDP for Q1. The Federal Open Market Committee meeting takes place on Tuesday/Wednesday followed by announcements on any rate changes and forecasts. During a scheduled press conference with Ben Bernanke, the Federal Reserve Chair is likely to comment on the potential for an economic slowdown and the outlook for another quantitative easing program.
Earnings season continues with AT&T, 3M, Amgen, Caterpillar, Boeing, Exxon, Dow Chemical, Merck, Proctor and Gamble among those reporting.
On Friday of last week, the New York Times published two articles regarding the outlook for the economy. The first, which figured prominently on the front page, was titled, “Fears Rise That Recovery May Falter in the Spring.” The second article, occupying the first page of the Business section highlighted falling debt levels as an indicator for increased consumer consumption and future economic growth.
That same Friday, a Wall Street Journal’s headline read “Economic Reports Fan Fears,” while the Financial Times columnist Michael Mackensie sought to balance the bulls’ arguments with the bears’ reasoning in his reporting. The week was capped on Saturday by Barron’s Big Money poll and top story, “Outlook: Mostly Sunny.”
Clearly there is a debate going on, centered on the recent market pullback. Is it for real? Or are we zig-zagging our way to improving times?
The bears will tell you that we have been here before – twice – once in 2010 and again in 2011. The economy skidded through a soft patch, the hiring spigot was reduced to a trickle, and fears of a double dip recession were on everyone’s lips. The bears contend that it is the same old story in 2012 – we have experienced another false start.
The bulls respond, “Nonsense; it is different this time.” Corporate health is strong, interest rates remain low and global shocks are more manageable this year than last. Stocks simply got ahead of themselves and are now consolidating. Markets need a breather before they can gather the energy for the next leg up.
Let’s blame the confusion on the weather – always an easy scapegoat but not entirely without merit this time round. An exceptionally warm winter affected two aspects of the economy: hiring and manufacturing.
Without harsh weather to slow everyone down, businesses began adding employees early this year. That pulled demand for workers forward into January and February, which saw impressive job growth of 275,000 and 227,000 respectively. However, early hiring takes away from the numbers in successive months. That could explain the low 120,000 March jobs number and may foretell another weak report for April. If jobs bounce back in May, the zig-zagging story could prove to be the winner. But if businesses begin to worry that their early optimism was unjustified, it could be 2011 all over again.
The similar pattern holds in the manufacturing sector. Regional activity, which was fairly robust in the first two months of the year, is losing some of its momentum, as reported this past week on surveys taken in the New York and Philadelphia regions. With companies sporting beefed up balance sheets and conceivably suffering from recession fatigue, they may have ramped up activity too soon during the mild winter and are now backing off.
Countering the weather argument is data on spending. Auto sales have been strong since the beginning of the year and show no signs of abating. And retail spending for March was a healthy 0.8%, as reported this past week. If the consumer doesn’t slow down, demand will be sufficient for businesses ramp up hiring once again.
Where does all this debate leave the markets? Equities could vacillate between a healthy breather and a correction. But we aren’t anticipating a larger retracement. Given the current fundamentals, it would likely take a major shock to push equities into bear territory. Still, any market pullback can tug at investor’s emotions.
Markets seldom march in a straight line. But no matter where equity prices land, investors should be careful not to pull the trigger too soon or stay too late. Keep an eye on jobs, manufacturing and spending. And watch the weather, as well.
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*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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