Don’s Outlook 2/19/10
The four-week slide for most stock markets ended last week after two-thirds of global markets had declined more than 10% since the mid-January highs. The S&P 500 managed a nearly 1% gain last week, reversing its own 8% decline since Jan. 19. After last year’s outsized rally, which was largely in anticipation of a lasting recovery, this year’s performance has been tempered by fears of stalling or muted growth. But, so far, those fears are largely unwarranted. This week the broader markets marched higher and added nearly 3% to their upswing through Thursday.
Despite its attempts to be transparent and prepare investors for adjustments, the Federal Reserve raised the primary credit rate, or discount rate, by 0.25% on Thursday. The only hint that this change was eminent seemed to appear in Chairman Bernanke’s testimony, in which he stated that we should expect a higher discount rate “before long.” It is probable that the lack of additional notice was due to the fact that this adjustment is minor and does not reflect any change in policy. Although the change can be seen as the first step toward tightening, the Federal Funds rate remains unchanged and monetary policy remains extremely accommodative. The Fed has wound down several of its emergency programs this month, indicating that credit conditions have normalized even further.
Additional positive data over the past two weeks included retail sales and manufacturing results. January retail sales surprised to the upside, with a 0.5% increase that beat expectations. Although consumer confidence remains weak, an influx in spending indicates a pickup, especially at the high-end of retail. The sales component, on which gross domestic product (GDP) is based, climbed 0.8% month over month in January, indicating a 2.8% annual rate in the first quarter, which is a stronger annual pace than we recorded during the second half of 2009. This week the Empire State manufacturing index rose by more than expected in February’s reading, but results hinted at trend moderation. The Philadelphia Fed manufacturing survey also climbed higher, but details, such as the new orders component, were stronger.
The corporate earnings picture continues to shape up nicely. Now that more than 80% of the S&P 500 market capitalization has reported, earnings per share (EPS) are estimated to be $17.33 for the fourth quarter, even after accounting for Troubled Asset Relief Program (TARP) paybacks. Adding back the one-time hits implies an annual rate of $74 EPS for S&P 500 stocks, which would be more than 40% higher than the initial $51.50 projections for 2009. Unlike previous quarters, higher sales rather than cost cutting has added to the strong results and positive outlooks. In fact, nearly 70% of companies have beaten their sales estimates, indicating that a sustained recovery in revenues and earnings is underway.
