U.S. Stocks are Opening Higher this Morning Ahead of Institute of Supply Management (ISM) data and Additional Earnings News

AAA?2/1/11: 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.

Stocks opened higher this morning on mostly well-received earnings reports and on gains overseas as Middle East contagion fears continue to abate.  The latest batch of earnings, including UPS, Biogen, Archer Daniels and Pfizer was positive, although BP shares were lower after its report.  Asia’s major equity averages made modest gains overnight, while European markets are solidly higher on rising manufacturing surveys in the U.K. and the Eurozone.  Today’s key domestic economic data point is the Institute of Supply Management’s manufacturing survey for January, which is expected to remain strong.

Looking back at Monday, stocks rebounded from Friday’s selloff on strong U.S. data which helped refocus investors on a still improving outlook here at home despite challenges abroad.  The domestic data included reports on personal income and spending for December.  While Middle East tensions had little impact on stocks yesterday, commodities were impacted as crude rose more than 3% to over $92, broad commodity indexes gained about 2% and the Resource sectors topped the rankings.  The one sector that fell, Consumer Staples, is the one that is perhaps the most negatively impacted by commodity price inflation.

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

Municipal bonds firmed for a second straight week. Average intermediate to long-term AAA yields declined by 6 to 8 basis points last week.  Municipals were once again supported by traditional buyers who continue to find value in current municipal yields.  Individual investors have not returned to this market, although the pace of fund redemptions is expected to slow.

Credit markets outperformed last week even with Treasury strength. Average investment-grade corporate yield spreads were unchanged at 1.6% while high-yield bond spreads contracted by 4 basis points to 5.34%, according to Barclay’s Index data.  S&P reported that only one issuer defaulted in January.  The current pace is well below the total of 50 issuers that defaulted in 2010.  While the pace may pick up, the number of defaults is on track to decline further and S&P’s estimate of 35 total defaults in 2011 may be too conservative.  A relatively good earnings season thus far has also been positive for corporate bondholders.

The upcoming budget season may include more negative headlines about the AAA rating of U.S. Treasuries. Should the Obama administration’s budget fail to include steps to address the deficit and a rising debt burden, both S&P and Moody’s may warn of a change to the outlook.  The “outlook” is not a downgrade and instead refers to a potential intermediate to long-term ratings direction.  Should U.S. Treasuries lose their AAA rating, the impact may be negligible for bond investors.  Ratings changes by themselves are rarely market movers and market-based indicators can foreshadow whether any ratings change may end up being benign (as was the case with Japan) or truly negative (Greece).

Good earnings news continues. Led by the Energy sector following ExxonMobil’s strong results, Technology, Materials and Industrials are also performing well.  An impressive 76% of S&P 500 companies have topped earnings-per-share (EPS) estimates and 71% have exceeded revenue targets.  On the negative side, the majority of Utility companies have missed on both the revenue and net income lines.  Consumer Staples companies have also struggled amid rising input costs, with one-third of companies having missed earnings-per-share estimates and two-thirds have fallen short of total revenue targets.

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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