Week Ahead: Jobs Report, FOMC Meeting and A Flood of Q4 Earnings!
Stock Market: S&P 500 Vaults 1,500 As Rally Continues
Wall Street: Stock Market Bulls Keep Running And Bears Hibernate!
by Ian Harvey
January 28, 2013
Stocks should continue to march higher if there are no nasty surprises in the deluge of economic reports expected in the week ahead.
The economic calendar starts with durable goods Monday, consumer confidence Tuesday, and ending with the important January employment report and ISM manufacturing data Friday. The Fed meets Tuesday and Wednesday though expectations are low that it will make much news.
There are also dozens of earnings reports in the week ahead, including industrials, such as Caterpillar, and major oils like Exxon Mobil, which surpassed a shrinking Apple Friday to become the largest U.S. company by market cap.
• ‘The Past Week’
• ‘The Upcoming Week’
• ‘The Economy’
• ‘Earnings and Company News’
• ‘A List of Key Events’
• A List of Companies Reporting
• ‘Sentiment Effect on Stocks’
• ‘Stock Strength’
Expect to see 160,000 nonfarm payrolls, above the 155,000 new jobs created in December. Also, economists are watching to see whether the lower level of jobless claims reported in the last two weeks continues in the week ahead, signaling a better job market, or whether they will adjust back to higher levels, as many expect.
Stocks have been on a tear in January, moving major indexes within striking distance of all-time highs. The bears have seemingly hibernated to their caves and are not presenting a forward case!
Earnings have exceeded expectations, the housing and labor markets have strengthened, lawmakers in Washington no longer seems to be the roadblock that they were for most of 2012, and money has returned to stock funds again.
The S&P has risen for four straight weeks and eight consecutive sessions, the longest streak of days since 2004. On Friday, the benchmark S&P 500 ended at 1,502.96 - its first close above 1,500 in more than five years.
The most recent Reuters poll of Wall Street strategists estimated the benchmark index would rise to 1,550 by year-end, a target that is 3.1 percent away from current levels. That would put the S&P 500 very close to the index's all-time intraday high of 1,576.09 reached on October 11, 2007.
The New Year has brought a sharp increase in flows into U.S. equity mutual funds, and that has helped stocks rack up four straight weeks of gains, with strength in big- and small-caps alike.
Earnings Reports for the Past Week
We may have seen less than a third of the fourth quarter earnings reports thus far, but that’s enough to give us a good sense of how the rest of this reporting season will likely turn out. The bottom-line verdict is that it’s not as bad as many of us suspected.
Leaving aside earnings growth, which is non-existent, on most other metrics the fourth quarter reporting season is quite good. Not only are the ratio and magnitude of surprises better than the previous quarter and comparable to the last many, but the tone of management guidance has also been on the reassuring side.
Last week was dominated by Tech, but this week has everything – from Amazon (AMZN) and Facebook (FB) to Exxon (XOM), Caterpillar (CAT) and Boeing (BA). By the end of the week, we will have seen Q4 earnings results from 65.2% of the total market cap of the S&P 500.
Total earnings for the reports that have come out (147 of S&P 500 companies as of Friday, January 25th) are up +0.9% from the same period last year, with 63.9% of the companies beating expectations with the median earnings surprise of +2.7%. Performance on the revenue front is a lot better, with total revenues up 5.1%, 59.2% of the companies coming ahead of revenue expectations and a median revenue surprise of +0.5%.
In terms of the ‘beat ratio’ and median surprise, the Q4 thus far is better than what this same group of companies did in the third quarter, and in line with the average for the last four quarters.
The earnings growth of +0.9% for the 147 companies is better than what these same companies did in the third quarter, but is sharply lower compared to the preceding several quarters. The Technology sector is a major contributor to the lack of earnings growth for the broader index. Tech sector earnings are tracking +0.6% for the companies that have reported and this growth pace is unlikely to change much in the coming days since the Tech companies that have reported already account for almost 75% of the sector’s total earnings.
Strong growth in Finance (+28.7%) is keeping the aggregate growth in the positive territory. Excluding Finance, total earnings for the reports that are out would be down -5.9% from the same period last year – a weaker performance relative to the third quarter.
All 10 S&P 500 industry sectors are higher in 2013, in part because of new money flowing into equity funds. Investors in U.S.-based funds committed $3.66 billion to stock mutual funds in the latest week, the third straight week of big gains for the funds, data from Thomson Reuters' Lipper service showed on Thursday.
Exchange-traded funds have seen year-to-date inflows of $15.6 billion, with fairly even flows across the small-, mid- and large-cap categories.
The new all-time highs in the Dow Transportation Average has fueled further buying as some expect the Dow Industrials and S&P 500 will also soon make new all-time highs.
The March crude oil contract closed above $96 last week and the technical outlook continues to be strong. There is some resistance in the $98 area with next major resistance at $100.
The metals had a rough week and look like they will continue to move lower this week as the technical action has turned more negative.
The SPDR Gold Trust (GLD) gapped below its short-term uptrend, line a, last week suggesting that the recent lows at $158.39 will be tested, if not broken. The volume increased on the decline and the on-balance volume (OBV) has turned lower after testing its downtrend, line b. There is strong resistance now in the $162-$164 area.
The Global X Silver Mines ETF (SIL) has also dropped below it support in the $21.58 area, line c, which is a very negative development. It suggests that the recent trading range was just a continuation pattern or a pause in the overall downtrend. Volume picked up late last week and the OBV has also dropped to new lows.
Economic Reports in the Past Week
Economic growth has been steady, and supports the view that the strength in the stock market was a sign that the economy was really better than expected. Last fall, there were quite a few analysts who thought that we were already in another recession.
The outlook for the housing market continues to improve as while existing home sales were down a bit it was likely because of a lack of supply. These charts from the New York Times show the strong uptrend in prices and the downtrend in the number of existing homes on the market.
This is a bullish combination that has important implications for the economy as the housing market has played an important role in past recoveries. Rising home prices also impact the consumer who is likely to spend more. The New Home Sales data showed an unexpected drop last Friday, but November's data was revised higher and prices are still climbing.
Adding to the overall bullish tone in the market, German business morale improved for a third consecutive month in January to its highest in more than six months. In addition, European banks said they will repay the European Central Bank much more than expected of the loans the bank gave them during the crisis.
Earnings and Company News in the Week Ahead
It’s premature to close the books on the Q4 reporting as more than two-thirds of the earnings reports have still to come. The week ahead promises to be the busiest thus far, with 413 companies coming out with quarterly results, including 105 S&P 500 companies. With Q4 earnings results from 147 S&P 500 companies already out, as of Friday January 25, we will cross the halfway mark by the end of this week.
Bellwether companies reporting earnings in the week ahead include: Caterpillar (CAT) and Seagate Technology (STX) on Monday; Amazon.com (AMZN) and Pfizer (PFE) on Tuesday; Boeing ( BA) and Facebook (FB) on Wednesday; and ExxonMobil (XOM) and Merck (MRK) on Friday.
Boeing, in particular, will be closely watched in the week ahead given the airplane makers’ recent troubles with its grounded 787 Dreamliner model.
Total earnings for the 353 S&P 500 companies that are still awaited (of which 105 will come out in the week ahead alone) are expected to be down -1.7%, while total revenues are expected to be down -3.8%. The composite growth rate for Q4, where we combine the reports that have come out with those still to come, is +0.4% for earnings and -0.6% for total revenues. These would be modestly better than the previous quarter, but not in any material sense.
In fact, earnings growth was essentially flat in the last two quarters of 2012. Looking ahead, total earnings are expected to be down -2.2% in the first quarter, up +4.4% in the second quarter, up +7.4% in the third quarter and up +16.1% in the fourth quarter of 2013.
A List of Key Events for the Week Ahead
All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Earnings in the Week Ahead: Caterpillar, Yahoo, Biogen Idec, BMC Software, VMWare, Celanese, Graco, Roper, Illumina, International Rectifier, Seagate, Crane, Olin
• 8.30 am Durable goods
• 10.00 am Pending home sales
• 10.30 am Dallas Fed Survey
• 1.00 pm $35 billion 2-year note auction
Earnings in the Week Ahead: Amazon, Ford, Pfizer, Eli Lilly, DR Horton, EMC, Harley Davidson, Illinois Tool Works, Corning, Ashland, Allstate, Valero, Peabody Energy, International Paper, Tyco, Tupperware, Broadcom, Boston Properties, Nucor, CIT Group, AK Steel
• 2-day FOMC meeting begins
• 9.00 am S&P/Case Shiller home prices
• 10.00 am Consumer confidence
• 1.00 pm $35 billion 5-year note auction
Earnings in the Week Ahead: Boeing, Facebook, Qualcomm, Fiat/Chrysler, Hess, Conoco Phillips, Cannon, Marathon Petroleum, L-3 Comm, MeadWestvaco, JDS Uniphase, Northrop Grumman, NTT DoCoMo, Phillips 66, Cannon, ADT, Wisconsin Energy, Booz Allen Hamilton, Manpower Group, Southern Co, Skyworks, Owens-Illinois, Murphy Oil, Duke Realty, Rockwell Automation
• 7.00 am Mortgage applications
• 8.15 am ADP employment
• 8.30 am Real GDP fourth quarter final
• 1.00 pm $29 billion 7-year note auction
• 2.15 pm FOMC statement
Earnings in the Week Ahead: Deutsche Bank, Royal Dutch Shell, Aetna, Blackstone, Altria, Hershey, Time Warner Cable, Viacom, Dow Chemical, UPS, Chubb, McKesson, PerkinElmer, Reinsurance Group of America, Manitowoc, Thermo Fisher Scientific, MasterCard, Colgate-Palmolive, Dominion Resources, Occidental Petroleum, Ericsson, Potash, Pulte Group, Bemis, Corinthian Colleges, Meritage Homes, Ryder Systems, Eastman Chemical, CR Bard
• 8.30 am Initial claims
• 8.30 am Personal income
• 8.30 am Employment cost index
• 9.45 am Chicago PMI
Earnings in the Week Ahead: Exxon Mobil, Chevron, Merck, Tyson Foods, Beam, Ingersoll-Rand, Mattel, Newell Rubbermaid, Lear, Aon
• Monthly vehicle sales
• 8.30 am Employment report
• 9.55 am Consumer sentiment
• 10.00 am ISM manufacturing
• 10.00 am Construction spending
Sentiment Effect in the Week Ahead
The renewed interest in the stock market has caused a sharp increase in bullish sentiment of individual investors. According to the American Association of Individual Investors (AAII), the bullish% surged from 43.9% to 52.3% last week with the number of bears dropping to 24.27%.
One should know that the individual investor is not always wrong, as a high level of bearish sentiment seems to be more reliable than a high level of bullish sentiment. For example, the recent higher readings were 55.88% on January 6, 2011, and 63.28% on December 23, 2010. The S&P 500 had a low of 1,205.72 on December 20, 2010, and reached a high of 1,422 on April 2, 2011.
Last week the number of bullish and bearish financial newsletter writers was unchanged at 53.2% bullish and 22.3% bearish. In April 2011 the number of bullish hit 57.3%.
The attitude of the financial press and the individual investors has certainly changed from early January.
Bonds in the Week Ahead
The bond market will also focus on supply in the week ahead, when $99 billion in two-, five- and seven-year notes are auctioned by the Treasury Monday through Wednesday.
While the 10-year yield could reach two percent in the near future, it will likely reverse course and move lower as buyers come in. The very fact stocks are going up might mean something threatening to bonds.
Stock Strength in the Week Ahead
Stocks appear resilient in the market -- the fact that stocks held their gains and moved higher in the face of Apple's decline was seen as a positive by analysts. This shows a healthy move away from one strong leader, and the spreading of money into other stocks that can help take the market higher in the week ahead.
Apple lost 12 percent for the week, and more than 14 percent Thursday and Friday, or $69.7 billion in market cap. That puts it at $413.79 billion, just under Exxon, which is valued at $418.23 billion. Howard Silverblatt of Standard and Poor's points out that the $246.7 billion Apple lost in market value since September is greater than the value of IBM and equal to the bottom 66 stocks in the S&P 500.
Conclusion for the Week Ahead
The daily seasonal chart of the S&P 500 that analyzes data going back to 1930 reveals that typically stocks peak in early January, decline until January 24 before rallying until February 2. This has not been the case so far this year. Typically an early February high sets the stage for a decline that lasts for most of the month. This sets the stage for stocks to move higher into May.
For the last three years, prices have been higher in February with gains of 4.06% in 2012, 2.95% in 2011, and 2.85% in 2010. Looking back over the past 40 years, February was one of the two months that showed a loss, but it was considerably better than September, which was the worst month.
Now, some stock market strategists are already raising their yearly upside targets for the S&P 500.