The S&P 500 closed unchanged (at 0%) on Friday — emblematic of the tight range the stock market is stuck in.
Stocks last broke new highs in July 2015. They pushed closer early last week, as it seemed there was much less in the global economy to worry about compared to a few months ago.
Last Monday, the Dow crossed 18,000 for the first time since July 2015, while the S&P 500 crossed 2,100 for the first time this year on Tuesday. But as the week went on, stocks pulled back.
This is no reason to be discouraged, according to Brian Belski, BMO’s chief investment strategist. “We caution investors not to confuse our indifference regarding market direction as a recommendation to avoid adding exposure to US stocks,” he wrote to clients.
All about earnings. It was a huge week for earnings in the tech, consumer, and manufacturing industries. On the tech side, reports out of Netflix, Microsoft, and Google got a cool reception from investors while McDonald’s and Under Armour were the big winners on the consumer side as Starbucks‘ sales lagged expectations. Earnings from Caterpillar and Schlumberger, meanwhile, continued to paint the picture of a global manufacturing climate that stinks.
On the tech front, at both Microsoft and Google, part of the story was the same: revenue growth stunk. In addition to missing on revenue expectations Google — or rather, Alphabet — disclosed that its “other bets” revenue totaled just $166 million while operations losses in the segment totaled $802 million. This “other bets” part of the company, you’ll recall, was the whole reason for creating the Alphabet umbrella over the top of its cash-cow Google unit. Netflix, meanwhile, forecast significantly lower international subscriber growth than had been expected and continued to show that it is burning through cash.
Here are two things that people really like: Stephen Curry and all-day breakfast. And both of these proved winners for Under Armour and McDonald’s, respectively. Curry, the NBA’s best player, was cited by Under Armour CEO Kevin Plank as a major reason the company’s footwear revenue jumped 64% in the first quarter to $264 million. McDonald’s CEO Steve Easterbook said the popularity of all-day breakfast was behind the company’s 5.4% increase in same-store sales in the US.
Global manufacturing, meanwhile, continues to be a tough space with Caterpillar on Friday morning reporting profit and sales that missed expectations, sending shares south. And according to Caterpillar CEO Doug Oberhelman, it was all bad news, “Sales declined across the company with substantial reductions in construction, oil and gas, mining and rail.”
Schlumberger, which is the world’s largest provider of oilfield services, said the industry is operating, “in a full-scale cash crisis. Schlumberger CEO Paal Kibsgaard added, “This environment is expected to continue deteriorating over the coming quarter given the magnitude and erratic nature of the disruptions in activity.”
- New Home Sales (Mon.): Economists expect the pace of new home sales rose 1.6% in March to an annualized rate of 520,000. This is less than the increase seen in the prior month but still indicates strong activity in home sales.
- Dallas Fed Manufacturing (Mon.): The Dallas Federal Reserve’s latest reading on manufacturing activity in the region is expected to show a continued decline. Economists expect the measure to come in at -10 for April which would, however, be stronger than the -13.6 seen in March. Over the last year and a half this measure has been closely watched for indications on how hard the crash in oil prices is hitting Texas’ economy.
- Durable Goods Orders (Tues.): Durable goods orders are expected to rise 1.9% in March, bouncing back after a 3% decline the prior month. Stripping out airline and defence orders — which tend to be more volatile — durables orders should rise 0.5%.
- Case-Shiller Home Prices (Tues.): The February reading on home price appreciation from S&P/Case-Shiller should show a 0.75% increase in home values month-on-month and 5.55% over the prior year, indicating a continued acceleration in home prices that is at about double the rate of core inflation.
- Markit Flash Services PMI (Tues.): Markit Economics’ preliminary reading on activity in the services sector is expected to show an acceleration in the first part of April, rising to 52.0 from 51.3 in March’s final reading. This measure is closely tracked as services make up the vast majority of GDP.
- Consumer Confidence (Tues.): The April reading on consumer confidence from The Conference Board is expected to fall slightly to 95.6 from 96.2 last month. March’s report beat expectations and also showed that the number of consumers who said jobs were “plentiful” hit its highest level since September 2007.
- Richmond Fed Manufacturing (Tues.): The latest manufacturing report from the Richmond Fed is expected to show a continued rebound in activity in the region, with April’s reading expected to hit 12, showing expansion in activity though a at a slower pace than the snapback seen from March’s 22 reading.
- Pending Home Sales (Weds.): The National Association of Realtors’ latest report on the number of contracts signed to purchase a home is expected to show a 0.3% increase in this figure in March.
Federal Reserve Interest Rate Announcement (Weds.): The Federal Reserve is expected to keep interest rates in a range of 0.25%-0.50% in its latest policy statement due out Wednesday. This announcement, which is not accompanied by a press conference from Fed Chair Janet Yellen, should be about as low-key as any Fed statement could be, with markets already focused on its June 15 announcement which could see a change in the benchmark policy. “The post-meeting statement, released Wednesday afternoon, should continue to strike a cautious tone,” Deutsche Bank wrote in a note to clients.
The firm adds: “There will be no press conference and updated economic and financial forecasts will not be released. We do not expect the FOMC to add the ‘balance of risks’ sentence back into its communiqué at this point. Doing so would be quite bearish for risk assets as it would definitely open the door for a June rate hike. Over the past week, the probability of a June move increased, although the chances are still relatively low.”
- Initial Jobless Claims (Thurs.): The latest weekly report on initial filings for unemployment insurance should show claims totaled 258,000 last week, up from the prior week’s 247,000, which was the lowest single-week total since November 1973.
- First Quarter GDP (Thurs.): The first estimate of GDP growth in the first quarter is expected to show the US economy grew at a paltry 0.6% rate to start 2016, slower than the 1.4% pace of growth seen at the end of last year. This report is also expected to show consumption rose 1.7% to start the year, down from 2.4% to end 2015. Economists at BNP Paribas expect GDP will expand at a 0.8% rate to start the year, writing that, “Consumption growth is also likely to have softened, to 1.8%. GDP growth in line with our forecast will make it challenging for the Fed to say that activity is still expanding at a ‘moderate pace.'”
- Employment Cost Index (Fri.): The employment cost index, a more comprehensive measure of pay that includes wages as well as benefits, is expected to rise 0.6% in the first quarter. This measure has gained a large following over the last year-plus as Fed officials have made clear that wage growth is going to be a major consideration when weighing further increases in its benchmark interest rate.
- Personal Income and Spending (Fri.): The March report on personal income and spending is expected to show incomes rose 0.3% in March while spending increase 0.2%. Both readings would be improvements over February’s 0.2% and 0.1% increase in these measures, respectively. This report will also give us the latest reading on personal consumption expenditures, an alternative reading on inflation that is preferred by the Federal Reserve over the more commonly-cited consumer price index. PCE data should show that “core” consumer prices rose 1.6% over the prior year in March, down from 1.7% in February and still indicating that inflation remains comfortably below the Fed’s 2% target.
- Chicago PMI (Fri.): April’s reading on manufacturing activity in the Midwest is expected to show a continued expansion in the region with the latest Chicago PMI expected to hit 53.0, down slightly from 53.6 but better than the contraction that had been seen in recent months.
- University of Michigan Consumer Confidence (Fri.): The final reading on consumer confidence in April from the University of Michigan for April is expected to hit 90.0, better than the 89.7 preliminary reading but still not totally encouraging as the preliminary number was a five-month low for the measure.
Stocks pulled back last week after coming within reach of all-time highs.
We were here about a year ago, in May 2015, when stocks retreated from near-records.
Fundstrat’s Tom Lee, a steadfast bull, thinks that this time around, stocks are poised to break new highs and even reach double-digit gains through the year-end.
In a video to clients, he outlined some of the market’s setbacks last year and pointed out how these have reversed course:
In May 2015, the S&P 500 had some headwinds. The dollar was still strong, and rising. Oil was still falling. High-yield spreads were still widening. Global economic momentum [as seen through PMIs] was actually turning downwards. And, the market internals, measured by advance/decline lines, was actually pretty poor.
… We think that fundamentals and technicals are better today, while we’re in the same position. The dollar is flat to falling — we think outright will weaken through the summer. Oil is flat to rising and we think has bottomed, and even if you don’t think it’s bottomed, you probably agree that we’re closer to a bottom than we were a year ago. High yield has been rallying, but it’s been rallying so strongly that the spreads have decisively fallen below its 200-day moving average — something you haven’t seen since June 2014. Global PMIs have started to move upwards. And finally, technicals: there’s much greater participation in terms of the number of stocks and the advance/decline line is at all-time highs.
The second reason, as seen in the map below, is in search for yield. Bonds in much of the developed world are yielding much lower the US bonds, high yields and even stocks on a dividend basis.
“We think this is supportive of stocks, especially considering that we don’t think central banks are going to reverse course anytime soon,” Lee said.
Tobias Levkovich, Citi’s chief US equity strategist, echoed this sentiment in a note:
A constructive equity market view for 2016 is still appropriate, but recent weakness is providing a better return environment.
Extraordinarily supportive investor sentiment and attractive valuation are key, with improved EPS growth due to the base effect of 2015’s plunge in Energy sector earnings and drag from negative currency translation given 20% appreciation in the US dollar, though Energy profits are expected to be down significantly again this year.
So, I guess the message is, stay long and stay strong.
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