Markets, Economy

Weekly Kickstart (05/02/2016-05/06/2016)

5/2/16 8:00 AM

iStock_000000499785_Small-1Stocks headed lower last week, with the S&P 500 falling by 1.26 percent. This was a disappointing finish to April which left the benchmark index with a paltry month-over-month gain of just 0.27 percent. However, the S&P 500 is still up 1.05 percent 2016-to-date and just 3.07 percent below the record high hit in May of last year, not surprising after rallying for eight of the past eleven weeks. Volatility also picked up during the last five trading sessions due to a deluge of news and data for market participants to digest. For example, the Federal Open Market Committee (FOMC) announced on Wednesday that the target range for the federal funds rate would be left unchanged at 0.25 percent to 0.50 percent. It was widely anticipated that officials would hold steady with rates in April but the statement released by the committee was arguably a bit more hawkish than expected. The reference to global events posing risks to the domestic outlook, for instance, was removed from the April Fed statement, signaling that officials are less concerned than they were at the March FOMC meeting about overseas developments turning into headwinds for the U.S. economy. However, Fed policy makers do not want to seem too aggressive and spook the stock market. This is why the statement again stressed that officials expect economic conditions in the U.S. to “evolve in a manner that will warrant only gradual increases in the federal funds rate,” essentially saying that the Fed is in no hurry to hike. Moreover, last December Fed officials projected that there would be four rate hikes in 2016 but current market expectations would imply only one interest rate increase this year which is not until December after the election.

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Another factor behind last week’s choppy price action was corporate earnings season, which included a big disappointment from Apple. Specifically, the tech giant reported quarterly earnings, revenue, and guidance that were all below analysts' estimates. Overall, though, earnings season has been going a lot better than expected. For example, most analysts originally predicted that first quarter results would decline at the steepest pace in several years but so far, according to FactSet, 74 percent of the companies in the S&P 500 that have already reported earnings released results that beat forecasts. This is well above the past five years’ average beat-rate of 67 percent, and something that more experts now attribute to exchange rate fluctuations. Indeed, the U.S. dollar suffered its worst quarterly performance in Q1 since 2010 due to the Fed signaling early this year that it could take a slower approach to raising short-term interest rates. Since a strong dollar can weigh on foreign demand for U.S. goods and services, the first quarter reversal in the greenback contributed to the upside earnings surprises now being reported by many multinationals. However, the weaker U.S. dollar by itself was likely not enough to help many companies in the energy sector turn a profit last quarter. In fact, more than half of the energy companies in the S&P 500 are expected to show quarterly losses and if this sector does wind up reporting an aggregate earnings decline for Q1, it will mark the first time that this has occurred for any sector in the S&P 500 since Q4 2008. Companies in the energy arena might fare much better in Q2, though, because the price of crude oil has continued its significant rebound in April, and West Texas Intermediate last week even climbed back above $45 per barrel for the first time since November. Another interesting headline from last week in the energy space involves Exxon Mobile, which had its AAA credit rating stripped by Standard & Poor’s on Tuesday. The world’s largest publicly traded oil company had held onto that top credit grade for more than six decades but after last week’s ratings action there are only two triple-A corporations left, i.e. Microsoft and Johnson & Johnson.

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To recap what we learned about the U.S. economy last week, the positives included that pending home sales rose, wage growth accelerated, consumer inflation pressures moderated, and the number of Americans making first-time claims for unemployment benefits remained at a multi-decade low. As for the negatives, mortgage and refinance applications slid, new home sales growth slowed, demand for U.S.-manufactured durable goods (excluding transportation) declined, business investment fell, consumer confidence slipped, the rebound in regional manufacturing activity lost a bit of momentum, and real gross domestic product (GDP) growth fell to a 2-year low. This week the pace of economic data remains elevated, with lots of important reports on manufacturing, productivity, and employment scheduled to be released, along with the potentially market-moving April job report from the Bureau of Labor Statistics (BLS) due out this Friday.

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What To Watch:

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Sources: Econoday, Bloomberg, Twitter, BofAML, WSJ, FRBG, FactSet, et al

Post author: Charles Couch