With no glaring headlines since the FOMC meeting to drive the action, one has to fo a little digging to identify the issues the market seems to be struggling with. And while this market can and often does change directions in the blink of an eye (which takes, on average, between 300 and 400 milliseconds), traders seem to currently be focused on the Fed, the expectations for the upcoming earnings parade, the ongoing spate of punk economic data, as well as valuation concerns in areas such as biotech and semiconductors.
Not As Dovish As She Seemed?
One of the primary themes over the past week has been the idea that the Fed isn’t really as dovish as Ms. Yellen’s comments led many to believe after last week’s FOMC press conference. In fact, there has been a fair amount of talk about the stock market rally in response to Yellen’s dovish commentary being overdone.
If one listened to the latest flurry of Fedspeak that included Williams, Evans, Lockhart, Bullard, and Fischer last week, it was clear that nobody really changed their tune. As such, this seems to suggest that not much has not really changed in terms of the overall Fed narrative.
Earnings In Focus
Last week also saw a continued string negative earnings preannouncements for Q1 with worries about oil, the dollar, and the weather blamed as the major headwinds. According to FactSet, S&P 500 earnings expectations for Q1 have fallen by 8.2% since the beginning of the year, which represents the largest decline in the estimates since the first quarter of 2009.
FactSet also reported that as a result of the downward revisions, the Street is now looking for a -4.6% decline in Q1 S&P 500 earnings per share, which is down from expectations for +4.2% growth at the start of the quarter. And if you find yourself wondering why stocks would be able to rally in the face of falling earnings, you are not alone.
Not surprisingly, the energy sector has seen an outsized amount of revisions on the back of the sharp decline in oil prices. In addition, dollar strength has been the other big driver of earnings “resets.” Finally, the crummy winter weather and protracted West Coast port strike were some of the other common themes coming from corporate America last week. As such, you can rest assured that traders will be listening to the each and every earnings report very carefully in the coming weeks.
Not a Bubble, But…
While all the recent talk of bubbles seems a bit humorous to anyone who was in this business in 1999, there is no denying that stocks are reaching overvalued levels when viewed through any traditional absolute valuation lens. In addition valuation concerns seem to be front and center at the present time in some of the mo-mo plays such as biotech and semiconductors.
For example, after finishing higher in each of the six previous weeks and gaining 16% during the run, the Nasdaq Biotech Index lost 5.3% last week. Granted one glance at a weekly chart of the IBB will quickly suggest that a pullback was overdue. However, one can’t help but recall the “Mo-Mo Meltdown” that took place at this time last year and as such, there is some concern that traders may go back to the well on this trade.
Semis were also under pressure last week with the SOX down 5% on the week and falling 4.6% on Wednesday alone. The primary catalysts for the selling included negative preannouncements and talk of a slowdown in demand over the last four to five weeks due to FX pressures.
It’s The Economy, Or Is It?
Finally, the recent trend of softer US economic data, particularly in the manufacturing sector, has been highlighted as another overhang for the markets recently. But, given the fact that most everybody on the planet knows that the weather and the port strike are the primary reasons for the weak data, traders have been giving the data a pass lately.
The key here will be to watch the data in the coming months. Should the reports remain on the punk side, you can rest assured that traders and their computers will notice as the topic of yet another “soft patch” could take center stage. Yet a great many analysts expect to see the data pick up going forward, a dynamic that would seem to confirm the “blame it on the weather” theme.
So there you have it. Although stocks are not really cratering and there isn’t much fear in the air at this time, there is no denying that issues such as economic data and earnings might become a problem for this market if things don’t perk up. But then again, this market may change directions 9 or 10 more times before any of these issues really present themselves.
Turning to This Morning…
The mood in the markets appears to be much improved in the early going on this fine Monday morning. Gone are the fears about the economy, valuations, earnings and what Ms. Yellen’s merry band of central bankers are going to do next (and when). No, this morning, traders are celebrating the fact that China appears poised to do more to stimulate their fledgling economy. With reports over the weekend suggesting that Q1 GDP could come in well below the 7% target level, there is more talk of stimulative measures. In fact the PBoC kicked things off this morning by lowering down payment requirements for home buyers. Across the pond, bourses in Europe are up nicely as there are no new negatives to report. And here at home, the potential merger between Intel (INTC) and Altera (ALTR) announced Friday seems to have traders doing an about-face on the subject of valuations in the semiconductor space. U.S. stock futures are currently pointing to a strong open on Wall Street.