Last week was a witches’ brew of economic data & events with a volatile mix of stock and bond returns. The major point of discussion was the decision to cut 50% of Greek debt, a potential turning point in the European debt debacle. Stocks in the S&P 500 responded very favorably to the decision which was a big contributor to the 3.8% weekly gain. We’ll take the upside for now but we are still skeptical about the plan’s implementation and efficacy.
A majority of U.S. companies have posted 3rd quarter earnings with an average of 75% beating their projected earnings per share. As the reporting season winds down, markets will shift their focus back to economic data. This week will include:
1. Auto sales
3. Employment situation
The private sector has been the linchpin to job creation however the overall jobs picture is still subpar. We’ll need to see nonfarm payrolls sustainably exceed 150,000 jobs per month to get the economy moving and reduce the still elevated 9.1% unemployment rate.
“Thinking is easy, acting is difficult, and to put one’s thoughts into action is the most difficult thing in the world.”
- Johann Wolfgang von Goethe
Last week saw U.S. stocks rise to a two-month high with the S&P 500 closing at 1238.25 (up 1.1%). Bonds were little changed on the week as the 10 year Treasury note closed at 2.21%. No Joy in Mudville has changed to, perhaps, a glimmer of hope in stock land … we’ll see.
Earnings reports have been reasonably strong with over 70% of companies reporting better-than-expected results. Corporate balance sheets remain strong, and we suspect that things are not quite as bad as headline news would lead to us to believe. Mergers and acquisitions could provide a bump to market sentiment as companies look to put their large cash positions to work.
Valuations remain reasonable, and we look for prices to move higher into year-end. Earnings reports and news out of Europe will likely dictate market direction this week. Let’s hope that European leaders are serious enough to stem the euro crisis.
“Take time to deliberate; but when the time for action arrives, stop thinking and go in.”
Whipsaw – A condition where a security’s price heads in one direction, but then is followed quickly by a movement in the opposite direction. The origins of the term is derived from the push and pull action used by lumberjacks to cut wood with a type of saw with the same name.
Through the first two weeks of October, stocks have bounced back significantly from the recent lows of the 3rd quarter. The S&P 500 has increased ~ 8% this month following last quarter’s loss of ~ 14%. We have been experiencing this level of whipsawing since August; however the S&P 500 has essentially been flat over this time period. I was always taught to keep my eyes on the horizon when I felt seasick, investors should do the same.
This week will be full of earnings reports as earnings season kicks into gear. We will focus on the strength of the previous quarter as well as management’s tone about the future. We suspect they will be a bit less sanguine than in recent quarters as storm clouds linger.
“A smooth sea never made a skilled mariner”
- English Proverb
Last Friday the jobs report for September showed employers added 103,000 jobs which was better than consensus expectations although 45,000 of that was due to the return of striking Verizon workers. On a positive note August jobs were revised up by 57,000 from zero. The unemployment rate remained at 9.1%.
According to most estimates employers need to add 125,000 jobs per month just to keep up with population growth and 200,000 per month to bring the unemployment rate down.
This week look for the start of earnings reporting season beginning with Alcoa on Tuesday followed by PepsiCo, Google and J.P. Morgan Chase. In July analysts expected companies in the S&P 500 to post earnings growth of + 17%. As of last week that had been revised down to + 12.6% which may give companies an opportunity to exceed expectations and lend support to last week’s rally. As a reminder the 4th quarter has been the best quarter for the stock market with an average return of 4.5%.
“We are all faced with a series of great opportunities brilliantly disguised as impossible situations.”
- Charles R. Swindoll