April 28, 2014 - Markets Retreat Amid Volatility

April 28, 2014

Earnings seasons is halfway over, and thus far, among the 240 S&P 500 firms that had reported as of last Friday, total revenues are up 3.7%, and earnings results are up 2.0% from the same period last year. Overall, while growth remains weak and fewer companies are beating revenue estimates, the general sentiment is: "not bad." Excluding the Finance sector (which is being dragged down by weak Bank of America results), revenue and earnings growth last quarter was in line with historical averages.[2]

Why the volatile market performance last week? Investors already knew Q1 results would be weak, and those negative expectations were mostly priced into markets. However, markets are forward-looking and traders are more concerned about growth prospects going forward. The escalating tensions in Ukraine also weighed on investors, who are nervous about the potential effects of geopolitical issues on corporate profits. If Russia makes good on its threats to cut off natural gas supplies to Ukraine and Europe, general prices would probably go up, hurting consumer demand and economic growth in Europe. This could have serious implications for firms doing business overseas.[3]

Economic data was a mixed bag last week. The number of Americans filing new unemployment claims rose more than expected last week, but economists think the increase is seasonal and doesn't suggest any fundamental shifts in the labor market. We'll have a clearer picture when the April jobs report comes out this Friday.[4] Durable goods orders surged in March as businesses purchased long-lasting goods like household appliances, cars, and consumer electronics. An increase in this area generally means that retailers expect to be able to sell those products in the coming weeks and months.[5] Consumer sentiment rose to a nine-month high in April as Americans became more optimistic about current and future economic prospects. Though consumer sentiment is known to be volatile, we can hope that improving job and business conditions will lead to greater consumer spending this quarter.[6]

Investors will have a lot to digest in the week ahead with a Federal Open Market Committee (FOMC) policy meeting on Tuesday and Wednesday, the first Q1 Gross Domestic Product (GDP) estimate on Wednesday, and the April jobs report on Friday. Analysts don't expect the Fed to change interest rates or its QE tapering schedule, though Fed Chairman Janet Yellen might use her official speech as an opportunity to provide further guidance about interest rate plans.

ECONOMIC CALENDAR:

Monday: Pending Home Sales Index, Dallas Fed Mfg Survey
Tuesday: S&P Case-Shiller HPI, Consumer Confidence
Wednesday: ADP Employment Report, GDP, Employment Cost Index, EIA Petroleum Status Report, FOMC Meeting Announcement
Thursday: Motor Vehicle Sales, Jobless Claims, Personal Income and Outlays, Janet Yellen Speaks 8:30 AM ET, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Friday: Employment Situation, Factory Orders

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Services sector slows expansion in April. The services sector, containing industries like financial services, hospitality, and healthcare, added jobs at the slowest rate in almost two years. Slow hiring could challenge the assertion that the job market is broadly improving.[7]

Manufacturing sector expands in April. U.S. factory output growth increased at the fastest pace in three years, driven by domestic demand. On the other hand, inventories fell, indicating that future demand for factory products may fall.[8]

Home sales suggest persistent weakness in housing market. New home sales dropped sharply in March, while sales of existing homes fell slightly for the third month in a row. Realtors blame rising mortgage rates and cold weather for plummeting sales, but some analysts think that housing prices have risen too high, putting ownership out of reach for many workers.[9]

Chinese manufacturing activity remains weak. Though manufacturing sector activity rose in April, it remains below target growth, supporting other economic indicators that show China's economy may be stalling.[10]

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The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

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