After a one-day setback last week on Wednesday, the major averages have resumed their 2013 uptrend. In the process the Dow Jones Industrials, the S&P, the Russell 2000 Index of small stocks, the mid-cap indexes and the Dow Jones Transports have all attained new all-time highs once again.
And it was the same combination of factors that underlined the latest advance, namely the ability of most companies to beat their first-quarter earnings estimates and the determination of central banks around the world to keep interest rates at record low levels. And for a change, investors were also treated to a pleasant surprise as the April jobs report made for much better reading than what the forecasts for it had been.
Of the 406 S&P companies that have already reported, 69 percent have beaten their earnings forecast, above the 67 percent average of the past four quarters and the 63 percent average since 1994. But revenue remains disappointing, as it has been flat overall with only 46 percent of S&P companies topping expectations, well below the 52 percent average for the past four quarters and the 62 percent beat rate since 2002.
On the other hand, it should be pointed out that profit growth for the quarter is now projected to be 5.2 percent, better than the forecast in January which was for earnings gains of 4.3 percent and only 1.5 percent as recently as April 1.
The E.C.B. joined other central banks as it lowered its benchmark lending rate to a record 0.5 percent, down from 0.75 percent as they said that “Our monetary policy will remain accommodative for as long as needed.” This was their first cut in 10 months and held out the possibility of further policy action to support the recession-burdened Euro-zone economy. They promised to provide as much liquidity as E.U. banks need well into next year and also to help smaller companies get access to credit. Some policymakers had actually pushed for a bigger cut.
They joined the Fed which said at the conclusion of its latest meeting that it will continue to buy $85 billion in bonds each month in order to keep interest rates low to potentially spur economic growth, and they even added that they would step up purchases if needed to protect the economy.
As they expressed concern about the drag from Washington, D.C. belt-tightening, the Fed described the economy as expanding moderately. They pointed to continued improvement in labor market conditions and kept their description of inflation the same by saying that it should remain at or below the central bank’s two percent target. They reiterated their concern that the unemployment rate is too high and once again repeated their intention to keep buying assets until the outlook for jobs improves substantially. “Fiscal policy is restraining economic growth” said the statement released at the end of last week’s meeting and they added that they are “prepared to increase or reduce the pace of purchases in order to maintain appropriate policy accommodation.” This basically means that they can fine-tune their bond buying as economic conditions dictate.
As an example of how the efforts by central banks to keep interest rates at very low levels works, AAPL just completed a $17 billion offering of three-year notes at a walloping .45 percent yield which was actually oversubscribed by three buyers for every note that was issued to the tune of $50 billion of bids. This shows how central bank efforts to flood the system with cheap money can help companies improve their earnings by being able to borrow at such ridiculously low levels.
And for a change we got a much better than expected economic report, as the April non-farm payroll number showed that 165,000 total positions were created last month, which consisted of 176,000 private payroll increases minus 11,000 government jobs that were eliminated. More importantly, that awful original March number of only 88,000 was revised sharply higher to 138,000, which of course raises the question of why these numbers are not released with a two-month time lag in order to give investors a more accurate reading and not force them to sell out like they did after the incorrect 88,000 number was published.
To make this report even better, the February number was revised really sharply higher to show a 332,000 gain which was the largest since May 2010, and this was a 64,000 additional revision. On the other hand, the gains were still below the monthly average of 206,000 jobs that were created in the first quarter, which, it could be argued shows a slowing trend.
Construction jobs fell for the first time since last May and manufacturing jobs were unchanged. More optimistically, the 0.1 percent decline in the jobless rate down to 7.5 percent actually reflected a gain in employment, rather than what happened last month when people left the workforce. This jobs gain number is still below the 300,000 or so that is still needed to put a significant dent in the 7.5 percent unemployment rate and means that the Fed is probably not going to “adjust” its bond buying program higher, although the data were not strong enough to make them adjust it lower either for the time being as well.
We might be seeing a change in investor preference for certain groups of stocks if the perception of a better economic recovery as highlighted by the jobs report continues to take hold, and that is the rotation into stocks that fare well when the economy is expanding, such as technology, cyclicals and industrial issues. These groups have lagged the more defensive groups this year such as consumer staples, health care, telecom and utilities. The latter group has gained 19 percent in 2013 on average, eight percentage points ahead of the former group.
This potential trend change has been underway for the past three days, as AAPL has been rallying lately after the announcement of a dividend increase and the largest share buyback in corporate history to the tune of $50 billion, GOOG just made a new all-time high and the Dow stock that had been the worst performer this year, CAT, has begun to awaken from its recent decline as well. On the other hand, such Dow leaders that represent the more defensive sectors such as JNJ, PG, VZ and T have begun to cool off a bit.