Surprising Strength in the Recovery, From Bob Doll, vice chairman and chief equity strategist, BlackRock
Economic data continues to show that the recovery is stronger than most had expected, thanks in large part to the massive fiscal and monetary stimulus enacted around the world, which has sparked a recovery in growth even beyond some of the most optimistic projections. When the recovery began, it was driven primarily by a rebound in manufactured goods and inventory levels, and while the manufacturing sector continues to be the source of greatest strength, the economic recovery has broadened to include other sectors as well. Demand among both consumers and companies around the world has been rising, and consumer spending has been stronger than expected (although spending has been coming from savings, rather than from growth in incomes).
These trends imply that production levels have not yet caught up with demand, which augurs well for the ongoing boom in production. There are some
medium- and long-term headwinds to economic growth.
Among the most notable are expanding deficits and the probability of higher tax rates, which will likely restrain growth at some point in the future, although these threats have not yet manifested themselves.
From a geographic perspective, the strongest growth rates continue to come from the United States and Asia. Europe¹s economy has moved out of recession, but its recovery remains weak, as the region has been hampered by its inability to unify over plans to combat fiscal crises.
Corporate earnings have also continued to exhibit strength. The first batch of first-quarter earnings has shown that 81% of companies have beaten revenue expectations and 79% have exceeded earnings forecasts. These results have prompted consensus 2010 earnings projections to move higher. Stocks have rallied in an almost uninterrupted fashion over the past couple of months, but the tenor of Friday¹s news adds an element of uncertainty. This backdrop, combined with various signs of excess in the markets, suggests that a period of profit-taking may be coming, perhaps sooner rather than later. In any case, however, the recovering economy, low inflation, strong corporate earnings and reasonable valuation levels should be enough to cause any sort of correction to be short-lived. We expect that stocks should continue to outperform Treasuries and cash over the course of the year and, barring some sort of policy mistake or surprise event, believe that the current bull market is likely to continue.
A Mighty Wind, From David Kelly, chief market strategist, JPMorgan Funds
Last week, despite mostly positive economic numbers and overwhelmingly positive earnings reports, the Dow struggled to stay above the 11,000 mark it breached on Monday. The biggest reason was the headline that the SEC was charging a major investment firm with fraud. It’s not appropriate, in my job, to make any comment on this specific case and I won’t. However, the market sell-off makes it clear that investors perceive this case to be part of a bigger theme.
The excesses of the housing bubble and the reckless behavior of many lenders, borrowers, investors, speculators and regulators have fueled a swelling storm of populism that is blowing across the American landscape today. Politicians and voters alike are looking to assign blame and exact retribution for the financial crisis and deep recession which it caused.
However, no matter how justified many of these sentiments may be, the winds of populism rarely act to strengthen the economy. However good it may feel to beat up on the banks, to fine them, tax them, impose higher capital standards upon them and discourage them from making “risky loans”, the truth is that one of the greatest threats to this emerging economic recovery is that the banking industry stays too conservative, partly because of these pressures, and is thus unwilling to take the measured risks which are essential to finance a growing economy.
These clouds will presumably continue to rumble over financial markets this week, and it is a close call as to whether positive economic and earnings news will be able to dispel them.
Cautions, From Jeffrey Saut, chief investment strategist, Raymond James
We are “stepping up” our cautionary counsel this week. Our increased caution is driven by a number of metrics. To wit, preliminary data suggests last Friday was the first 90% Downside Day since February, our sentiment gauges are back to as bullish as they were in 1987 (read that bearishly), the CBOE equity put/call ratio is at 0.32, for its heaviest “call volume” relative to “put volume” since August of 2000, stocks are the most overbought since the rally began in March 2009, some of the leading stocks are not responding to good news, Thursday was session 34 in the “buying stampede” that began on February 26th (rarely do such skeins last more than 30 sessions), we’ve gotten that peak-a-boo “look” into the long envisioned target zone of 1200 – 1250, volatility is back to the complacent 2008 levels, and the list goes on.
As for the news backdrop reinforcing our caution, while Greece is likely off the “bankruptcy table” in the near-term, it is not off the table in the intermediate-to-longer term. Emphatically, we think Greece will eventually default; and, it will not be the only country to do so. Indeed, we tend to view Greece as the Bear Stearns of Europe with nobody really knowing how many countries will fail next. Then there is Iceland’s volcano, which currently has no end in sight, and will most certainly impact the world’s economic statistics. In fact, I heard one commentator suggest that if the eruption lasted long enough it could foster another “ice age.” Then there was last week’s Goldman gotcha that suspiciously materialized in front of the movement toward financial reform. Studying the storied history of Goldman shows that Goldman revelations tend to mark inflection points in the equity markets.
Where Are the Revenues? From David Rosenberg, chief economist and strategist, Gluskin Sheff
It’s the very early days of the S&P 500 earnings season, but so far, the companies that have reported (47/500) have done well relative to analysts’ expectations (although we wonder if the bar was lowered too much heading into the reporting season).
Here’s what we know so far: total earnings are running at 9% YoY a few notches above last week’s 37% blended rate. Excluding Financials, the earnings rate is 29% YoY, up from 27% from last week. Revenues are running at 10% YoY, unchanged from last week’s tally. We’ll get a clearer picture next week, with nearly 125 companies reporting.
It’s interesting to see that earnings surprises seem to be driven by cost surprises rather than revenue surprises. Consider that for the S&P 500 as a whole, 83% of companies beat earnings expectations with the average “surprise factor” (i.e., results vs. estimates) of 23%. (As a comparison, the average long-run surprise factor for the S&P 500 is 2%.) However, for revenues, 68% of companies beat expectations but the surprise factor was only 3%, a fraction of the earnings factor. Yes, it’s early in the season but it does appear at this stage that analysts are underestimating firms’ continued ability to cut costs.
REPORTS CALENDAR
Monday, April 19:
March Leading Economic Indicators
Corporate Earnings: Citigroup, Eli Lilly, Halliburton, Hasbro, IBM
Tuesday, April 20:
Chain Store Sales (weekly)
Corporate Earnings: Apple, Bank of New York Mellon, Coca-Cola, Delta Airlines, Goldman Sachs, Harley-Davidson, Johnson & Johnson, State Street, TD Ameritrade, UnitedHealth, U.S. Bancorp, Yahoo
Wednesday, April 21:
Mortgage Applications (weekly)
Corporate Earnings: AT&T, Abbott Labs, Altria, Amgen, AMR, Boeing, eBay, EMC, E-Trade, Lockheed Martin, McDonald’s, Morgan Stanley, Netflix, Qualcomm, SLM, Starbucks, United Technologies, Wells Fargo
Thursday, April 22:
March Producer Price Index; March Existing Home Sales; February FHFA House Price Index; Jobless Claims (weekly)
Corporate Earnings: Amazon, American Express, Blackstone, Coontinental Airlines, Hershey, Kimberly-Clark, Marriott International, McClatchy Microsoft, New York Times, PepsiCo, Philip Morris International, Raytheon, Southwest Airlines, Verizon
Friday, April 23:
March Durable Goods Orders; March New Home Sales
Corporate Earnings: Honeywell, Schlumberger, Xerox
