Fed Hopes Keep the Rally Alive - Ahead of Wall Street
April 30 2013 - 5:56AM
Zacks
Tuesday, April 30,
2013
Does it make sense for the stock market to be in record territory
at exactly the time when the economic and earnings data is pointing
towards troubles ahead? No it does not, unless of course investors
were using the weak data as a proxy for continued support from the
Federal Reserve. And it is this Fed angle that lies at the core of
the strong momentum in the stock market.
The Fed’s two-day meeting getting underway today may not result in
any fresh announcements when the FOMC statement comes out Wednesday
afternoon. But the stock market will likely read any FOMC
acknowledgement of downside economic risks as indicative of a
longer duration for the QE program. Minutes of the March FOMC
meeting appeared to indicate that a growing number of the committee
members were thinking of modifying the QE program by the summer
months. But the March FOMC meeting took place before we got a slew
of weak economic data, indicating that a fresh Spring Swoon was on
its way. As a result, the market is assigning much lower odds to
any changes to the QE program this summer – and hence the stock
market in record territory.
The Fed is not alone in this easy-money policy – the European
Central Bank (ECB) and particularly the Bank of Japan (BoJ) are
active participants in this policy. Expectations remain high that
the ECB will announce a rate cut at its meeting this week, with
today’s tame inflation and high unemployment readings further
raising those hopes. The BoJ’s aggressive easing policy is likely
partly at play in our stock and bond market’s momentum. Treasury
bond yields may be very low by historical standards, but they look
‘juicy’ relative to what is available to Japanese investors at
home.
On the earnings front, we now have Q1 earnings reports from 295
S&P 500 companies that combined account for 69.4% of the
index’s total market capitalization. This includes this morning’s
line-up of releases from Pfizer
(PFE), U.S.
Steel (X),
Avon (AVP)
and others.
Total earnings for these 295
companies are up +2.2% from the same period last year, with 66.8%
beating earnings expectations. Revenues are down -0.4%, with only
38.6% of the companies coming ahead of top-line expectations. The
median surprise is +3.2% on the earnings side and negative -0.4% on
the revenue side thus far. The +2.2% earnings growth rate is
comparable to what this same group of companies achieved in 2012 Q4
and preceding few quarters, though the revenue performance is
decidedly on the weak side.
The composite growth rate for Q1, where we combine the results of
the 295 companies that are out with the 205 still to come, is for
+1.4% growth in earnings on +0.2% higher revenues. This earnings
performance would normally be inconsistent with a stock market in
record territory. But these are not ‘normal’ times; the Fed has
rigged the system. And fighting the Fed is never the best course of
action.
Sheraz Mian
Director of Research
AVON PRODS INC (AVP): Free Stock Analysis Report
PFIZER INC (PFE): Free Stock Analysis Report
UTD STATES STL (X): Free Stock Analysis Report
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