Stocks Rally As Earnings Season Officially Begins
Stocks rallied last week as investors returned from the long holiday weekend and digested the latest round of largely lackluster economic and earnings data. Earnings season officially began last week and a slew of companies will be reporting over the next few weeks. We will be looking for three things: 1. How the numbers compare to the same period last year 2. How the numbers are relative to estimates and 3. How the market and each stock react to earnings. So far, earnings consensus is very weak and FactSet reported that corporate earnings are expected to fall by -4.7%. Furthermore, analysts believe Q2 earnings will also fall by -2.1%. (Here comes the fun part), Just because earnings are down doesn’t mean the market can’t rally from here. Remember right now the primary driver of this very strong 6-year bull market is easy money from global central banks (a.k.a The Central Bank Put). As long as investors remain focused on easy money from global central banks – in some perverse way, weak economic data (for now) is bullish for stocks. Eventually this dynamic will change but until then – the logic suggests tepid economic data will translate into more easy money from global central banks, not less, and, at this moment, that is good for stocks.
Monday-Wednesday’s Action: Bulls Defend Support
Stocks rallied nicely on Monday which was the first day the market was open since March’s weaker-than-expected jobs report was announced on Good Friday. As a quick review, U.S. employers added 126k new jobs in March, missing estimates for a gain of 250k. On Monday, the ISM Non-Manufacturing Index slid to 56.5 in March, missing estimates for unchanged. This was the latest in a series of weaker-than-expected economic data points which suggests the Fed may not raise rates anytime soon. Remember the Fed has a dual mandate: help the economy and keep inflation near +2%. Right now, the economy remains lackluster at best and deflation is more of a threat than inflation. The Fed has told us (several times) that they remain data-dependent which means that the Fed is likely not in a rush to raise rates anytime soon – considering the data remains tepid at best.
Thursday-Friday’s Action: Earnings Season Begins
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrated its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.