The Market Dances in Place Ahead of Some Major Economic Events

After the astounding market recovery that was described in last week’s column, equities have sort of gone nowhere for the past few sessions with some of the same recent themes still at work. For instance, there has been a continued rotation out of the high-flying social media types of stocks, even though some of them reported better than expected earnings, such as FB and NFLX. For the ones that missed their numbers, they were punished with additional selling in addition to the downdrafts that they had succumbed to prior to the release of their numbers.

And speaking of earnings, at the mid-way point of the first-quarter reporting period, the results have shown some improvement, as with 249 of the S&P companies having reported profit growth for the first three months of the year is now projected to have increased by 3 percent. Let us remember that one of the reasons for the vicious selloff that took place earlier in April was that analysts shaved their first-quarter earnings estimates to a decline of 0.7 percent, which would have been the worst such showing since the third quarter of 2009. This contrasts with profit growth for the first quarter that was initially estimated to have grown by over 6 percent. Around 70 percent of companies that have reported have beaten their profit projections as opposed to the traditional 63 percent that surpass in this area, while only 54 percent have beaten on the revenue side against the usual 61 percent that do better in this area. As of now, these sales numbers are estimated to have grown by 2.7 percent.

There have been both good and poor reactions from individual companies after their results, with the most spectacularly positive one being the shares of AAPL, which have trailed the overall market badly since reaching a record high of over 700 back in September 2012 and falling as low as 390 on two occasions last year. Not only did they beat both the earnings and revenue expectations, but they managed through what is known as financial engineering to make up for their ongoing inability to come up with another blockbuster item such as the iPhone and the iPad. Sales of the former came in well above expectations primarily due to the fact that China Mobile, the world’s largest mobile carrier, has been selling the iPhones at a much better than estimated rate, while sales of the latter have been lagging.

They raised the dividend to $3.29 a share from the current $3.05 starting with the payment next month and they split the stock by 7:1. This is extremely important because at a split price of around $80 a share, they might finally be granted admission to the prestigious Dow Jones Industrial Average later this year. Because the Dow is a price-weighted average, at a current $590 a share, AAPL’s movements in either direction would overwhelm and distort this index, which is the reason why GOOG is not allowed in the Dow even though it is the third most capitalized stock, with AAPL being the largest. The split will allow investors who cannot afford to buy a stock in the $500’s a chance to buy it at a more reasonable price around $80 or so. And most importantly, once it is included in the Dow, the various index funds that create their portfolios based on major averages will now be forced to buy AAPL.

On the other hand, there have been former high-flying technology stocks whose shares have sold off sharply since their earnings reports, the most prominent one being AMZN, with which investors have had a love affair in recent years as it went to from $50 to $400 and even mighty GOOG has succumbed to selling pressure after its results came up short on both the earnings and revenue side.

This week will also see some very important economic events, with today’s release of the initial estimate of the first-quarter G.D.P. which is supposed to show a gain of only 1.2 percent which compares with a 2.6 percent rate in the last quarter of 2013. Investors will also get the latest statement from the F.O.M.C. as the Federal Reserve gives its latest views on the economy and the future course of interest rates. It is widely assumed that they will continue with their $10 billion a month of tapering from the initial $85 billion a month in bond purchases that was supposed to stimulate the economy. This latest tapering will bring the monthly amount down to $45 billion. Since this is widely assumed to be a given, market participants will be more interested to hear when the central bank might feel the need to begin raising interest rates from the current record low levels they have been at since December 2008 in order to deal with the disastrous market impact of the Great Recession.

Then on Friday we will see the release of the April jobs report which is currently estimated to show that 215,000 positions were created, and this would be the largest since last November and compares with the 192,000 jobs that were added in March. The condition of the labor market is always the most important input in the Fed’s thinking about the overall strength of the economy, which is why this number invariably has such a positive or negative impact on stock market trading during the day on which it is released.

Economic reports released over the past few days showed a mixed to slightly better picture, as March new homes sales fell by 13.5 percent to an eight-month low and weekly jobless claims rose to their highest level in a month, and these were offset by better readings from the final U. of Michigan Consumer Sentiment Survey that rose to the highest level in nine months and March pending home sales increased for the first time in nine months to their best level in three years.

Finally, the market has again been buffeted by developments in Ukraine, with prices going one way or the other whenever one of the major participants sticks in their two cents, as for instance last Friday when stocks sold off when the Deputy Prime Minister said that a Russian invasion was “imminent” and then stocks did better on Monday when it was discovered that Russian troops had pulled back from the border, and so it goes.

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