Earnings Reversal Sparks Volatility
Weekly Update - January 21, 2014
Markets ended the week mixed as markets responded to some lackluster Q4 earnings reports. For the week, the S&P 500 lost 0.20%, the Dow gained 0.13%, and the Nasdaq gained 0.55%.
Earnings reports contributed to the volatility investors saw in markets last week. Though earnings season is still young, companies seem to be beating revenue expectations but missing on earnings, a reversal of the trend we saw in previous earnings seasons. So far, reports suggest that revenues were up 0.5%, and 67% of reports have beaten expectations, which is a positive sign. On the other hand, the profit picture isn't as rosy. It seems that the effects of the government shutdown, a shortened holiday shopping season, and deep discounting trimmed profits last quarter.
On the economic front, the weekly job report shows that unemployment claims fell for the second week in a row, suggesting December's dismal results may be temporary. Consumer sentiment slipped in January, weighed down by lowered expectations among lower and middle-income families, who are worried about jobs and income growth. Though the Fed has been largely silent ahead of their late January FOMC meeting, it's likely that they are carefully weighing the data to determine next steps when Janet Yellen takes the reins in February. If overall economic data remains positive, the Fed could announce another round of tapering at the next meeting.
Bottom line: we're getting very close to the Fed's threshold rate of 6.5% unemployment, but the overall labor market is still weak. Given this weakness, the Fed will probably need to clarify its tapering plans and give guidance about how critical that 6.5% floor really is.
In Washington, the Senate finally approved a $1.1 trillion spending bill that will fund the government through the current fiscal year-end and quells fears of another government shutdown. Though the Treasury debt limit is still suspended until February 7, once the suspension expires, the Treasury will run out of money by the end of February. Hopefully Congress will avoid last-minute drama that could hurt confidence in the economy and quickly come to a bipartisan agreement.
Looking ahead, investors could see some more volatility around high profile earnings reports from major blue chip companies following the Monday holiday. While positive reports could result in a resumption of the 2013 rally, the volatility investors are experiencing can be described as the kind of correction we may expect to see after a sustained rally. With little economic news to move the markets as a whole, the individual forward expectations of each company will move stocks one by one, making it difficult to predict a trend.
Monday: U.S. Markets Closed for Martin Luther King Jr. Day
Thursday: Jobless Claims, PMI Manufacturing Index Flash, Existing Home Sales, EIA Petroleum Status Report
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.
Housing starts drop in December. After months of sizzling growth, groundbreaking on new homes fell 9.8% in December, the largest drop since April 2013. The decline was less than economists expected and was largely driven by the volatile multi-family homes segment. For 2013, housing starts increased by 18.3%.
U.S. industrial output surges in Q4. Industrial output rose at its fastest clip in 3-½ years, growing 6.8%, the largest quarterly increase since 2010. Factory output and overall industrial production rose in December, a positive sign for the economy in 2014.
Global economy expected to grow in 2014. According to a Reuters poll of economists, the world economy will grow 3.6% in 2014, as compared to 2.9% in 2013. While developed economies will do better this year, some emerging markets may struggle with fiscal reform and deflation.
Dollar rallies on economic data. The dollar surged against a basket of currencies, pushing the euro to a seven-week low after positive economic data suggests the Fed may stay on track with tapering measures.
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