It now seems that the market is using the old “bad news is good news” syndrome to keep advancing onward and upward, as the S&P reached a new all-time closing high on Monday and the Nasdaq closed at its best level in 12½ years as well. The major averages were poised to finish higher for the sixth straight month, the longest such streak since September 2009 and as of Monday they had ended in positive territory for six out of the past seven sessions.
And the syndrome mentioned in the first paragraph is that even though certain economic indicators came in below par in April, the consensus among investors was that this slowing of the recovery plus the lack of inflationary pressures means that the Federal Reserve will have no choice but to continue its current stimulus programs of purchasing $85 billion a month of Treasury and mortgage-backed securities with no end in sight. This of course means that the stock market is also operating under another old adage, which is — “Don’t fight the Fed!”
The below par data referred to earlier began at the beginning of April, as the March non-farm payroll report showed gains that were less than half of the 200,000 average number of jobs that had been created monthly since last November, as this most recent report showed that only 88,000 jobs had been added that month. Other signs of a slowing economy were that March advance retail sales declined, the April U. of Michigan Consumer Sentiment Survey fell to its lowest level in three months, February business inventories showed the smallest rise since last June, a sign that companies do not expect robust sales in the near future, the April NAHB Housing Market Sentiment Index recorded its third straight monthly decline, the March Index of Leading Economic Indicators fell for the first time in seven months, March durable goods orders dropped to the lowest level in seven months and the initial estimate of first-quarter G.D.P. came in below the consensus forecast as well.
This less-than-expected economic growth in the first quarter (2.5 percent versus a 3 percent forecast) heightened concern that an already slowing economy could have difficulty dealing with deep government spending cuts and higher taxes. In fact, if inventory growth is removed, the real rate of expansion was a very mild 1.5 percent.
Consumer spending, which makes up about 70 percent of economic activity, rose by 3.2 percent, the fastest since the fourth-quarter of 2010 and this came about despite the return of a two percent payroll tax hike and record high prices for gasoline at the pump in February and March. Households had to pare back on savings as incomes declined by 5.3 percent, which was the worst such decline since late 2009. The savings rate itself fell to 2.6 percent, the lowest since the fourth quarter of 2007, down from 4.7 percent in the final three months of 2012.
In addition to these signs of slower economic growth, inflation pressures were non-existent as both the March C.P.I. and P.P.I. were negative, the former showing its first decline in four months while the latter was the lowest in 10 months.
This slowing economic growth plus the lack of inflationary pressures will assure that the F.O.M.C. will say at the conclusion of today’s meeting that the monetary stimulus policies in effect since December 2008 will certainly continue despite the fact that at the last Fed meeting there were signs of dissent among some members who wanted to end these programs sooner rather than later.
Meanwhile, major economies in North America, Europe and Asia lost some momentum in April, which raised further concerns about the strength of the global recovery. China and Germany, the world’s largest exporters, both slowed as growth in Chinese factories fell to a crawl as export demand weakened while the E.U.’s largest economy saw business activity decline for the first time in five months. This raises the probability for an interest rate cut to a record low 0.5 percent at tomorrow’s E.C.B. meeting.
There was an unexpected contraction in China’s export orders to Taiwan in March and the latter is one of the region’s largest providers of technology components for mobile devices and computers. This could be another sign that Asia’s trade-reliant economies may be losing further momentum. The I.M.F. had already lowered its global growth forecast to 3.3 percent earlier this month, which is not a great improvement over last year’s 3.2 percent rate.
But never mind as far as the stock market was concerned, because of the 274 S&P companies that have reported their first-quarter earnings, 70 percent beat their profit estimates, which compares to the average for the last four quarters of 67 percent and the average since 1994 of 63 percent. On the other hand, revenues have only beaten in 43 percent of the companies that have reported, and this compares to an average beat rate of 62 percent in the last year and 52 percent since 1994. This shows that a good portion of the profits are the result of cost cutting.
It has been easier for companies to have bested the lowered earnings estimates, which had fallen to only 1.5 percent on April 1 from 4.3 percent in January. The most recent profit gains for the first quarter have come in at an advance of 3.6 percent.
The next big event after today’s interest rate announcement will be Friday’s April jobs report. Since the Federal Reserve and the president do not see the numbers until Thursday, today’s statement will not provide any “hint” of what to expect on Friday. The current estimate is for a gain of around 160,000 jobs with the unemployment rate remaining at 7.6 percent. The totals from the prior two months are always subject to revision and it will be instructive to see if that awful March total, the lowest in nine months, will be revised higher, and if it is not, then it would provide further evidence that the economy is indeed cooling. This means that the Fed will keep the pedal to the metal, so to speak, in terms of extending its stimulus programs, which of course should then provide the stock market with further fuel to advance and will probably mean that any pullbacks should be used as buying opportunities, and this is the pattern that has worked so well this year.
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.
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