Investors Look to Earnings to Reverse the Selloff in Stocks
It may prove to be too much to ask, but the reliance on first quarter earnings to pull stocks out of the doldrums seems almost universal. Investors seem willing to overlook policy uncertainty and evidence of some economic softening if earnings deliver as promised. But if they disappoint, stocks could come under renewed pressure and we may have already seen the high for the year in stocks. Factset now anticipates earnings growth of 17.3 percent in the first quarter, the highest since 2011 as the economy was climbing out of the great recession. We will soon find out if that is enough to not only put a floor under this market, but allow it to break above resistance.
Stocks Find Some Support in Positive Economic Data
Stocks did find some support last week as the quarter came to its close. The S&P 500 rose 2 percent, its first weekly increase after two previous declines. The gains derived some support from some generally upbeat economic data. A strong February durable goods report was followed by a mostly benign Personal Consumption Expenditures (PCE) deflator increase, offset in part by some modest softening in both readings of consumer confidence and sentiment.
Also, lending no small measure of support was the ongoing pullback in bond yields. The ten-year Treasury note ended the week at a yield of 2.76 percent, down five basis points. But as recently as the week prior its yield was 2.90 percent, after having peaked at 2.95 percent on February 21. The two-year note was little changed on the week, but did close at 2.27 percent, below its prior week high of 2.34 percent. The net result, however, was a further flattening of the yield curve to just 47 basis points between the two and ten-year notes, the narrowest reading since September, 2007 just prior to the onset of recession.
The best performing equity groups last week were those most sensitive to interest rates. Real estate, consumer staples and utilities led the way higher. Only telecom failed to deliver a positive return. And the dollar also found some support to end the week modestly higher.
All Eyes will be on the Pace of Economic Growth this Week
Before earnings season gets underway, the pace of economic growth will come under renewed scrutiny. According to the Commerce Department, last year’s fourth quarter was revised to an annualized pace of 2.9 percent, up from the previous estimate of 2.7 percent, including the strongest reading of final sales of domestic product in two and a half years. But the pace of this year’s first quarter has been continuously revised lower after initial optimism generated in part by tax reform. After forecasting growth as high as 4 percent in mid-February, the Atlanta Fed GDPNow tool estimates growth of 2.4 percent. The New York Fed Nowcast tool currently forecasts growth of 2.7 percent, down from readings well above 3 percent throughout much of the quarter. Neither result would be particularly disappointing, especially considering the consistent first quarter weakness throughout the expansion. But it would fall short of the administration’s projections of growth of 3 percent plus.
Topping the economic calendar this week is the March employment report. The Bloomberg consensus anticipates another solid result, with the creation of 190,000 new non-farm jobs and a 4.0 percent unemployment rate. And economists expect the all-important pace of average hourly earnings to rise to 2.7 percent year-over-year, a modest increase but not enough to reignite fears of incipient wage inflation. Also on the calendar are both ISM reports, as well as construction spending, vehicle sales and factory orders. Congress is not in session this week, but trade will likely remain front and center.
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S&P 500 Index: Is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The personal consumption expenditure (PCE) measure is the component statistic for consumption in gross domestic product (GDP) collected by the United States Bureau of Economic Analysis (BEA).
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