The Nitty Gritty Details:
U.S. stocks opened higher this morning after yesterday’s news that Al Qaeda leader Osama bin Laden had been killed by U.S. forces in Pakistan. In addition to sending stocks higher, the development pushed the dollar up and reduced risk premiums in safe-haven precious metals. The ISM for April is due out later this morning and may determine whether market gains hold. European stocks rose to a two-month high on earnings optimism and strong manufacturing data, while the Nikkei rallied back over 10,000 for the first time since mid-March. Commodities are mostly lower, weighed down by a rising dollar and falling risk premiums in oil and precious metals on the bin Laden news. Silver is getting hit especially hard following an increase in margin requirements for speculative positions at the CME. U.S. crude remains over $114 after gaining about 50 cents.
Looking back at Friday, April ended on a high note. Stocks were not up much Friday, but the week and the month were excellent and the S&P 500 has risen during seven of the past eight sessions. The broad index rose 2% last week, bringing the April return to a solid 3% and the year-to-date advance to over 9%. Earnings continue to be a key driver of the market’s ascent. On Friday, the ten S&P sectors finished in a tight range, except for Energy, which jumped 1.5% on a day when no other sector rose as much as a half percent. A nearly 1% rise in oil and more than 3% jump in natural gas, along with upbeat earnings reports, lifted the sector. Telecom lost the most ground with a 0.6% loss. Precious metals had a strong week and month, with gold and silver futures up 3.5% and 5.5% on the week and 8% and 28% for the month.
Around our financial planning firm this morning, we were discussing three items that we thought would be of particular interest to our readers:
The Markets Broken Down:
- More on possible market implications from the death of Osama bin Laden. As the combat troops leave Iraq and the proportional response to the threat in Afghanistan is now assessed with the death of bin Laden, the United States will likely regain the resources and focus to project more effective foreign policy influence over the rest of its interests. This is a potential “game changer” for many countries such as Russia, Iran, North Korea and even China among others that have gotten used to more regional power than they had prior to 9/11. This means that geopolitical risk in the capital markets may not decline materially, muting the market’s reaction. Separately, from a U.S. spending perspective, the death of bin Laden comes at a good time. First, it allows defense spending to be debated in the context of a withdrawal of troops from both Iraq and now Afghanistan. Second, it may – if only briefly-give Congress a reason to unite in a sense of national pride and address issues such as the debt ceiling.
- Traditionally, the first week of every month is full of timely economic data. This first week of May is no different, as a slew of key economic data, geopolitics and the debate over the U.S. debt ceiling are likely to replace first quarter earnings reports and guidance as the key drivers of market activity. From beginning to end, this week is full of crucial economic reports for April and March that will help guide actions of Federal Reserve policymakers and market participants. In addition to the data-which ranges from the April report on business from the Institute of Supply Management on Monday to the April employment report on Friday-Congress returns to work this week after a two-week break, with the debate over the debt ceiling likely to take center stage.
- Impressive corporate earnings continue. With two-thirds of S&P 500 companies having reported, the upside on the top and bottom lines at 2% and 7%, respectively, has been impressive, comparing favorably to recent quarters. The percentages of companies beating estimates have fallen, but remain solid at 70% and 76% on the top and bottom lines. As pleasing as the solid Q1 numbers have been, the overwhelming number of companies that have reaffirmed or even raised their outlook despite the many challenges – i.e., Japan, input costs, slower economic growth in developed economies – has perhaps been a bigger surprise to markets, fueling April stock market gains. Materials, Industrials, Consumer Discretionary and Technology have posted the best earnings numbers relative to expectations thus far, while Consumer Discretionary has been surprisingly resilient.
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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