As has been the pattern all year, the market bends but does not break, and recent action was no exception, as after the S&P underwent its largest downside correction of 2013 — a 3.8 percent decline from its record high on April 11 to its low on April 18 — things turned back around to the upside once again last Friday and this Monday.
As mentioned in last week’s column, after suffering its worst one-day decline of the year on Monday, April 15 due to a combination of slower economic growth in China, declines in both the April New York State Empire Manufacturing Index and the third straight monthly decline in the NAHB Housing Market Index, plus a record decline in the price of gold, a meltdown in commodities markets in general and the anxiety produced by the Boston Marathon bombing, markets have stabilized over the past two days.
Helping this stabilization was that gold, after declining by a record $140 dollars last Monday, has begun to steady and move higher for five straight days to the tune of $100, which also brought calm to equities in the sense that it showed that world economies were not going to be entering some sort of deflationary cycle. This was also evident in the subsequent recovery of energy prices, further proof that deflation was not at hand, because when prices are falling people are less willing to spend and more importantly, less willing to borrow.
Despite the recent calm of the past two sessions, last week saw the market’s worst performance since last November, as both the Dow and S&P declined by 2.1 percent while the Nasdaq ended 2.7 percent lower. This brought out fears that the market was in the process of following the seasonal pattern of the prior three years, as in 2010 it declined from mid-April to its worst point in early July by 16%, in 2011 it fell from the same starting point to its October low by 19 percent and last year the mid-April swoon reached 10 percent by early June.
Investor anxiety was not helped by lackluster economic reports, as the March C.P.I. had its first decline in four months; March building permits, an indicator of future housing starts, fell by 3.9 percent; March industrial production rose by a smaller-than-predicted amount; the April Philadelphia Fed Manufacturing Index declined from the prior month; March leading economic indicators dropped for the first time in seven months, and March existing home sales declined slightly when a small increase had been projected.
The main market mover this past week and for the next couple of weeks has been and will be first-quarter earnings reports, as profit projections had come down from their original 4.3 percent advance in January to only 1.5 percent on April 1. At the present time, they are now projected to show a gain of 2.2 percent but revenues are only expected to be 0.7 percent higher.
Of the 104 S&P companies that have reported so far, 62 percent have beaten the forecasts, somewhat below the traditional 67 percent that have beaten over the past 10 years, while only 43 percent have topped the revenue forecasts, well below the traditional average of 67 percent as well. This probably means that companies have achieved their profit goals largely through cost-cutting measures, which is not a good sign for the workforce.
As we have seen since the start of the earnings period last week, individual stocks have been rewarded or punished as the case may be after reporting their numbers. The Dow Jones Industrial Average has been helped by gains in JNJ, KO, MSFT and VZ after their numbers, and these types of stocks (except MSFT) belong to groups that have done the best this year, and they are known as defensive stocks because they tend to do well in a slowing economy and are favored because they pay steady and sometimes increasing dividends. These groups include consumer staples, health care, utilities and telecommunications, and some prominent names in the first group that have reached new all-time highs because of their recent earnings reports include KMB and PEP, both known for their steady growth and dividend payments.
This does not mean that what are called high-fliers, stocks that do not pay dividends but are more volatile in their price movements in both directions, cannot do well in this environment. CMG, GOOG and NFLX are examples of issues that did very well this past week as a result of their reports.
On the other hand, the Dow has been restrained by weak performances from components BAC, GE, MCD and IBM which put in its worst one-day showing in eight years. In fact, most of the large financials that have reported so far have done poorly. This group includes BK, GS, MS, NT and USB.
This will be the heaviest week for reporting first-quarter results, with 160 S&P companies expected to reveal their numbers, and by the end of the week we will have heard from Dow components (in order of their reporting) DD, T, UTX, BA, PG, 3M, XOM and CVX. In addition, other important companies that will report include (also in order) AAPL, AMGN, F, COH, EMC, QCOM, AMZN, MO, BMY, NYT and SBUX. And it seems a given that their shares will react either positively or negatively depending on the numbers and also by their forward guidance, potential dividend increase and share buyback announcements.
Then there is the never-ending Fed guessing game, in terms of how soon they are going to end their current QE monetary stimulus program. The release of the Fed Beige Book of economic conditions for various districts of the country showed that the economic expansion was “moderate” due to gains in manufacturing, housing and vehicle sales as opposed to weakness in defense-related industries. As recently as late last week, a few top Fed officials re-iterated the fact that contrary to what many investors believed after the results of the last F.O.M.C. meeting were released earlier this month, the Fed still believes that the economy needs the $85 billion monthly injection of both Treasury and mortgage-backed securities buying because of the fact that the job market is still sluggish and there is no evidence of inflation despite the easier monetary policy and this should ultimately still provide underlying support for stocks.
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
If you have any questions, contact firstname.lastname@example.org .