Stocks rebound on positive earnings reports, possible tax cuts

The definition of insanity is doing something over and over again and expecting different results. – Albert Einstein

After posting losses for the last two weeks, the Dow Jones Industrial Average and S&P 500 Index both rebounded with modest gains while the Nasdaq Composite Index hit an all-time on Thursday and ended the week up 1.8%. Although economic data and first quarter earnings results were mixed, it might have been comments from Treasury Secretary Steven Mnuchin that lifted stocks out of their doldrums. On Thursday he said that the Trump administration was very close to major tax reform legislation, one of the three pillars of Trump’s pro-growth policies that also include deregulation and increased infrastructure spending. Many investors had become skeptical that this legislation would pass this year in light of the failed attempt to implement health care reform. As far as earnings results were concerned, it was an up and down week. Financial heavyweight Goldman Sachs disappointed investors with weaker than expected revenues and profits while technology bellwether IBM reported stronger than expected earnings but lower revenue. It marked the 20^th straight quarter of year-over-year revenue declines for IBM. But offsetting these lackluster reports were those by Morgan Stanley, American Express, Bank of America, General Electric and Visa, all of which beat earnings estimates. So far this earnings season, about 80% of the S&P 500 companies that have issued their profit reports have surpassed expectations and about 70% have exceeded revenue estimates. With these impressive results, one would think that stock market gains  would have been  higher, but much of this good news has already been priced into the market. Lack of favorable guidance by corporations going forward may also be a factor in keeping the market range bound. The other concern for investors is the first round of elections in France as the fate of the European Union may be at stake as well as the likely direction of stocks over the near-term.

Last Week

Economic data was mixed last week and that was true of the housing data as well. The National Association of Home Builders (NAHB) survey showed that confidence fell in April but builders remained optimistic heading into spring. Housing starts in March fell more than expected but existing home sales rose to the highest level in more than a decade. Industrial production rose modestly in March and was in line with expectations but a Philadelphia Fed factory gauge or manufacturing index fell in April, although it remained at elevated levels. Weekly jobless claims rose slightly more than expected but were still consistent with a strong labor market.

The release of the Federal Reserve Beige Book showed that economic activity in all 12 districts was equally split between modest and moderate growth and that overall inflation remained modest despite tight labor markets.

For the week, the Dow Jones Industrial Average rose 0.5% to close at 20,547 and the S&P 500 Index gained 0.8% to close at 2,348. The Nasdaq Composite Index jumped 1.8% to close at 5,910.

This Week

The advance first quarter gross domestic product (GDP) numbers are forecast to show 2.2% growth and March durable goods orders are expected to increase modestly. March new home sales should be consistent with those reported in February and the Chicago Purchasing Managers’ Index (PMI) should post a reading of 57, in line with the previous month and solidly in expansion territory. Both the April consumer confidence index as well as the Michigan consumer sentiment index should remain near record levels.

There is a possibility that the U.S. government might shut down as the continuing budget resolution expires on Friday. In overseas news, the European Central Bank (ECB) and the Bank of Japan (BOJ) make a decision on interest rates.

It will be another busy week for earnings reports as AT&T, Comcast, McDonalds, Coca Cola, Pepsico, Procter & Gamble, Amazon.com, Intel, Microsoft, 3M, Boeing, Ford Motor, GM, Eli Lilly, Amgen and Exxon Mobil are a few of the most prominent companies scheduled to report.

Portfolio Strategy

After Treasury Secretary Steven Mnuchin announced that the Trump administration was close to bringing tax reform to the table, Trump himself echoed those same sentiments last week. He said that a plan to reform and cut taxes would be available by Wednesday of this week or shortly thereafter. In remarks made in February, Trump had described the plan as “phenomenal” and boasted that it would be passed “ahead of schedule”, even though no original timetable had been set. Both of these statements seemed to jump start stocks last week and rekindle the animal spirits that had been in place after the election. The failure to even vote on health care reform knowing full well that the votes weren’t there for passage cast a dark cloud on the rest of Trump’s pro-growth agenda. But the fact that Steven Mnuchin expressed optimism that tax cuts would be implemented this year was music to investors’ ears and helped turn the stock market around, snapping a two-week losing streak. If this rhetoric can result in action and first quarter earnings can continue to beat estimates, then there still might be additional upside to this aging bull market.