The Economy’s 1st Quarter Report Card Might Look Worse Than It Is

Report Card with teacher's note "We need to talk"4/25/11: 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:

The S&P 500 was flat this morning ahead of existing home sales data and following some mixed earnings news.  Two of the biggest challenges for corporate America, Japan and input costs, hurt results for two major manufacturers this morning, but overall earnings results thus far have been solid.  Overseas markets are very quiet with Europe still closed for the holiday, although China’s stock market fell more than 1% on fears of further tightening measures.  A weak dollar, escalating violence in Syria, and post-election tensions in Nigeria pushed U.S. crude over $113.  Gold is poised for its eighth straight day of gains, while silver is sharply higher and nearing all-time highs over $50.  Meanwhile, domestic weather concerns are pushing agriculture prices higher.

Looking back at the holiday-shortened week which ended Thursday, U.S. stocks gained about a half percent to end the week with solid gains.  Three of the four sessions were positive, with earnings news the primary catalyst for the gains.  Strength in the commodity sectors contributed to the positive week, as Materials and Energy beat the S&P 500 on Thursday and topped the weekly sector rankings.  The good earnings news, particularly from the Technology sector, helped offset tepid economic data including a drop in the Philly Fed Index and higher-than-expected weekly jobless claims.  The dollar’s slide continued, supporting last week’s broad-based rally in commodities.  The S&P 500 gained 1.3% for the week and is now up 6.9% year-to-date.

The Markets Broken Down:

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

  1. The main event this week for markets is the Federal Reserve. Not only will the Federal Reserve Open Market Committee meet this week, but we will witness the first-ever post-FOMC press conference by Fed Chairman Bernake.  In essence, the U.S. economy gets its first quarter report card this week, and the results are likely to look worse than they actually are.  The market’s reaction to S&P’s decision last week to put the U.S. credit rating on negative outlook is instructive, confirming our long-held view that the nation’s deficit and debt issues are a medium to long-term issue for markets, but that corporate and economic fundamentals will dominate in the short term.
  2. Corporate America continues to deliver despite challenges. Over 140 S&P 500 companies have reported Q1 results.  Thus far, results are positive with a solid 76% and 80% of companies beating on the top and bottom lines, by 3% and 7%, respectively.  Earnings are tracking to a 15% increase compared to the 12% expected at the start of reporting season.  Revenues are headed for an increase of 8.5% compared to expectations of 7.5%.  These results are particularly impressive given pressure on margins, Japan’s weakness, and the slowdown in U.S. economic activity last quarter.
  3. And, speaking of good earnings, they are broadly-based. In terms of sectors, Materials and Technology have exceeded EPS estimates by the greatest amount thus far, while Consumer Staples, Industrials, Materials and Technology have generated the most revenue upside.  Outlooks have been greeted with some caution, as estimates for the rest of the year have come down marginally despite the upside to Q1.  This week, another 180 S&P companies will report results.
  4. The dollar hits a three-year low, and approaches an all-time low. The on-going decline in the dollar is reinforced by several pressures, including the unsustainable budget deficit, slackening foreign demand, and the easy money actions of the Federal Reserve.  The dollar may get a respite this Wednesday when Fed Chairman Bernake may signal a pending transition in Fed policy.  However, any near-term strength is likely to be short-lived.

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
Wealth Consultant

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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