Stocks rallied last week as investors returned from the long holiday weekend and digested the latest round of largely lackluster economic and earnings data. Earnings season officially began last week and a slew of companies will be reporting over the next few weeks. We will be looking for three things:
- How the numbers compare to the same period last year
- How the numbers are relative to estimates
- How the market and each stock react to earnings
So far, earnings consensus is very weak and FactSet reported that corporate earnings are expected to fall by -4.7%. Furthermore, analysts believe Q2 earnings will also fall by -2.1%.
Here comes the fun part...
Just because earnings are down doesn't mean the market can't rally from here. Remember right now the primary driver of this very strong six-year bull market is easy money from global central banks (a.k.a The Central Bank Put). As long as investors remain focused on easy money from global central banks - in some perverse way, weak economic data (for now) is bullish for stocks. Eventually this dynamic will change but until then - the logic suggests tepid economic data will translate into more easy money from global central banks, not less, and, at this moment, that is good for stocks.
Monday-Wednesday's Action: Bulls Defend Support
Stocks rallied nicely on Monday, which was the first day the market was open since March's weaker-than-expected jobs report was announced on Good Friday. As a quick review, US employers added 126k new jobs in March, missing estimates for a gain of 250k. On Monday, the ISM Non-Manufacturing Index slid to 56.5 in March, missing estimates for unchanged. This was the latest in a series of weaker-than-expected economic data points which suggests the Fed may not raise rates anytime soon. Remember, the Fed has a dual mandate: help the economy and keep inflation near +2%. Right now, the economy remains lackluster at best, and deflation is more of a threat than inflation. The Fed has told us (several times) that they remain data-dependent, which means that the Fed is likely not in a rush to raise rates anytime soon, considering the data remains tepid at best.
On Tuesday, stocks were up for most of the day, but sold off hard before the close to end mixed. M&A news helped transportation giant FedEx ($FDX) to buy TNT, the Dutch Delivery company, for $4.8 billion. The acquisition was fueled by a very strong US dollar in recent months and allows FDX to become more competitive in Europe. In other news, Australia's Central kept its main rate at 2.25% which is there way of erring on the side of "easy money." In other central bank news, NY Fed President William Dudley said that when the Fed raises rates, the rate hikes will be very slow and that he expects economic growth to continue in the second half of the year. He also stressed that rates will remain low on an absolute basis once the Fed begins raising rates.
Stocks edged higher on Wednesday as Crude oil plunged nearly -6% and the Fed released the minutes from its March 17-18 meeting. The Fed remains divided on when to raise rates. Some FOMC members want to raise rates in June while others want to wait for September (or even longer) and stressed that their decision is based on the "data." The big news on Wednesday came from China, when the Shanghai Composite ($FXI) surged over +6%. Earnings season officially began after Wed's close when Alcoa, Inc. ($AA) reported better than expected first-quarter earnings. It was healthy for the global economy to see the company raise its 2015 global aluminum demand growth forecast to nine percent from seven percent.
Earnings Season Begins
Stocks rallied on Thursday and Friday as investors digested the first round of corporate earnings. In more central bank news, South Korea's central bank kept interest rates unchanged but cut its growth and inflation forecasts to 3.1% and 0.9%, respectively. Weekly jobless claims almost matched estimates while wholesale inventories beat estimates. Stocks rallied on Friday after General Electric ($GE) sold its real estate portfolio to Blackstone Group ($BX) and Wells Fargo & Co ($WFC) for $30 billion. General Electric also announced a $50 billion share buy back which sent the stocks soaring. In other news, the Dow Industrials topped 18k and the S&P 500 also broke above 2100.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrated its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & Oct. 2002, 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.
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