04/11/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.
The Nitty Gritty Details:
U.S. stocks opened higher this morning despite another Japanese aftershock as investors turn their attention squarely toward first quarter earnings season. The ongoing battle over the federal debt ceiling, China’s trade deficit and some merger news will also garner some investor attention today. European stocks were modestly lower on worries about the impact of rising input costs on profit margins, while Asian indexes were mostly lower as well as Japan was hit by yet another quake aftershock. On commodities, silver is over $41 this morning continuing its ascent, crude is down about 50 cents but still over $112 following a supposed Libyan peace agreement, and agriculture commodities are mixed.
Looking back at Friday, stocks ended a down week with modest losses. Crude near $113 a barrel and the potential for a government shutdown proved too much for U.S. equity markets to shake off as stocks fell on Friday and for the week. Higher oil prices pushed the Energy sector higher but weighed on Industrials, notably Transports which lost over 1%. Financials sector weakness also weighed on the broad averages. Key commodities indexes gained ground for the seventh straight session, as a weaker dollar, growing optimism surrounding the global growth outlook, and supply concerns continue to support the reflation trade. Friday’s gains were led by crude, copper, wheat and soybeans.
The Markets and You Broken Down:
Around our financial planning firm this morning, we were discussing three items that we thought would be of particular interest to our readers:
The S&P 500 earnings per share (EPS) for the first quarter of 2011 may set a record as the highest first quarter EPS in history. However, corporate profits have slowed as businesses have stepped up spending on materials, capital and labor. During this earnings season, we are paying special attention to business spending, the impact of high and rising commodity prices, and guidance from business leaders on the EPS outlook for coming quarters along with the impact from the events in Japan, North Africa and the Middle East. Although the S&P posted gains for 2010 as a whole, stocks were generally flat-to-down during the four earnings reporting seasons in 2010 – continuing a trend that started in 2009. The first quarter of 2011 bucked that trend with a modest gain as earnings from the fourth quarter 2010 were reported in January and February 2011. From a sector standpoint, earnings gains will be led by Energy, Materials, Industrials and Technology.
The outlook for Federal Reserve policy provides the backdrop for this week’s batch of economic data. In addition, the first “skirmish” in the great Budget Battle of 2011 is over, but an even bigger battle lies ahead. The key economic release in the United States this week could be the Fed’s Beige Book – a qualitative assessment of business conditions in each of the 12 Federal Reserve districts around the nation. Also in the spotlight this week will be the March CPI data and the March retail sales report. Overseas, China reports its economic data for March this week, as market participants try to gauge the timing of the next interest rate hike in China. On the budget front, President Obama is expected to release a plan this week to reduce the deficit as the battle over the debt ceiling ramps up. We expect debate about the debt ceiling limit to be front and center for the next two months.
The Big Board rejects Nasdaq. The board of NYSE Euronext issued a harsh rejection of the $11.3 billion unsolicited takeover bid led by Nasdaq OMX Group Inc., setting up a potentially awkward showdown between the Big Board and its own shareholders. In a statement Sunday, NYSE Euronext called the bid by Nasdaq “strategically unattractive” and entailing “unacceptable execution risk.” The NYSE reaffirmed its commitment to a $9.7 billion merger with Deutsche Borse announced in February, itself fraught with political and antitrust issues in both Europe and the United States.
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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