The Nitty Gritty Details:
Solid earnings, most notably from the Tech sector, are providing the formula for a very strong open this morning for U.S. stocks. The impressive results during the past 48 hours have returned this earnings season to the level of upside typical of recent quarters. Overseas, European and Asian stocks rose solidly after the encouraging earnings news. Virtually all major commodities are one to two percent higher this morning, with U.S. crude near $110 while gold topped $1500 for the first time ever and silver set another fresh 30-year high.
Looking back at Tuesday, stocks regained some of Monday’s selloff as market participants focused more on earnings and strong housing starts as opposed to the credit quality of the U.S. government. In addition, European tensions eased some following a strong manufacturing report in the Eurozone. Materials and Energy topped the sector rankings on higher crude prices and strong gains in steel producers. Heathcare also outperformed after a major industry player raised earnings guidance. The broad commodity indexes rose more than 1% on broad-based strength across energy, metals, livestock and wheat, benefiting from supply concerns, a weak dollar and debt problems.
The Markets Broken Down:
Around our financial planning firm this morning, we were discussing four issues that we thought would be of particular interest to our readers:
- Earnings season is back on track! After a lackluster beginning, corporate America is coming on strong. Nearly 80% of the 60 S&P 500 companies that have reported Q1 results have met or exceeded consensus EPS estimates, while a solid 70% have done so on the revenue line. Perhaps more important is that the upside to the bottom line is now tracking to about 5%, consistent with recent strong quarters after the earliest reports provided only marginal upside. Good news includes: (1) the impact from Japan in Q1 has thus far proven manageable, (2) input cost pressures have had limited impact, and (3) sluggish growth in developed markets is being offset by strong growth in developing markets.
- The market continues to shake off S&P’s rating warning. On Monday, the S&P downgraded the long-term outlook for U.S. debt from stable to negative , which sent the market sharply lower (1294 low for the index intra-day). However, the market has been dusting off this news ever since its initial downside reaction, and with today’s price action at the open, the S&P has eclipsed the level (1313) of the market prior to the announcement. The bottom line is that there is no “news flash” that the United States has a debt issue, but the market doesn’t fear the ability nor the willingness of the U.S. to make sure default on Treasuries is averted. The concern, rather, arises that austerity will indeed be sincerely adopted by Washington, which will have growth implications, especially when combined with China’s tightening, a frugal consumer, and a reticent corporate America.
- Does the move towards austerity in the U.S. and globally take some pressure off the Fed to raise interest rates? At the margin, yes. Austerity measures would likely slow economic growth which might give the Fed more leeway to keep rates lower for longer than they would otherwise, all else being equal. Any measures are likely to play out over the course of years, not weeks or months. The market at some point will start to price in slower future growth and reduced earnings expectations.
- Housing is less awful than last month. It is the small wins that matter when the times are tough and everyone can agree that times are tough in housing. However, building permits in March jumped up from 517,000 to 594,000, handily beating the 540,000 expectation from economists. This shows that the improvement in the employment front is finally finding its way to areas outside of just the malls and shopping centers and into bigger purchases like the housing market. We get our next measure of employment tomorrow when the weekly jobless claims are released and expected to improve.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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