Market little changed after earnings

Most people give up just when they are about to achieve success. They quit on the one-yard line. They give up at the last minute of the game one-foot from the winning touchdown. – Henry Ross Perot, American businessman and real estate developer

In a fairly volatile week that saw the S&P 500 Index reach an all-time high after tumbling more than one percent on Monday, the stock market was little changed after all was said and done. There certainly was no shortage of news with which to trade as fourth quarter corporate earnings reports were abundant and there was a plethora of economic data to decipher. Led by the major banks, investment houses and other financials, earnings were a mixed bag and in some cases were difficult to assess due to one-time charges that will not be part of future operating earnings. While Wells Fargo and Bank of America reported strong earnings that beat analyst estimates, Goldman Sachs and Citigroup were hurt by weaker than expected revenue growth. Disappointing profit reports from the likes of General Electric, Intel and Best Buy later in the week prevented the market from adding to its gains after it set a record mid-week. Economic data for the week was generally positive but not strong enough to overcome a somewhat disappointing start to the earnings season. For the stock market to trade higher, earnings will have to consistently meet or beat expectations and company guidance on future earnings must be positive. Without these conditions present, it may be difficult for stocks to continue their upward trend.

Last Week

For the most part, economic data was favorable last week and indicative of an economy that is gradually gaining strength. Excluding automobile sales, retail sales rose 0.7% in December, which was much better than expected. Automobile sales had actually hit a post-recession high in November but declined last month. The National Retail Federation also said that holiday sales in November and December increased 3.8%, in line with expectations. A Federal Reserve Bank of New York economic index that measures manufacturing rose to its highest level since May 2012, a sign that this sector is also improving.

Excluding the volatile food and energy components, the news on the inflation front was also encouraging as the producer price index (PPI) rose 0.3% while the consumer price index (CPI) rose just 0.1%. For the year, wholesale prices increased only 1.2%, well below the Fed’s target rate of inflation. The release of the Fed Beige Book also confirmed that the economy continues to grow at a modest pace. The report cited steady manufacturing growth, rising consumer spending and improving real estate markets as reasons to be optimistic about the economy. In other news, new home construction fell slightly in December but turned in the strongest showing since 2007 and industrial production last month rose modestly, in line with forecasts.

For the week, the Dow Jones Industrial Average rose slightly by 0.1% to close at 16,458 while the S&P 500 Index eased 0.2% to close at 1,838. The Nasdaq Composite Index climbed 0.6% to close at 4,197.

This Week

This holiday-shortened week will be light on economic data as only December existing home sales and leading economic indicators are on the calendar. Both are expected to rise only modestly. The World Economic Forum is held in Davos, Switzerland this week and heads of state from forty countries are expected to convene and share their thoughts about the global economy. The International Monetary Fund (IMF) is also expected to increase its forecast for economic growth in 2014 while China is expected to report 2013 GDP growth that will be the slowest since 1999.

This week will paint a much more accurate picture about the state of fourth quarter earnings as a wide range of companies are scheduled to report. IBM, Microsoft and Texas Instruments will represent the technology sector; Procter & Gamble, McDonalds, Starbucks and Kimberly Clark will announce from the consumer non-durables and cyclical sectors and Abbott Labs, Johnson & Johnson and Bristol-Myers Squibb will report from the health care sector.

Portfolio Strategy

Without any potential market-moving economic data this week, investors will focus on the slew of corporate earnings reports to gauge the health of the U.S. economy and prospects for earnings growth in the coming year. While the profit reports last week focused primarily on banks and financial firms, the diverse group of companies on tap for this week promises to offer a much better assessment of overall corporate profit growth. On a macro-economic level, all of the recent data suggest that the economy is gaining momentum as the manufacturing sector is expanding, the housing sector continues to improve and the labor market is seeing fewer and fewer jobless claims. With inflation still under control and interest rates at relatively low levels, corporations must somehow translate all of this favorable economic data into stronger revenue growth that will lead to higher earnings. Most companies have already cut expenses to the bone and now must rely on increased sales to generate faster profit growth going forward. Although retail sales were fairly strong in December, heavy discounting and promotional activity by retailers hurt profit margins and could be an ominous sign for the retail industry when most of these companies report their earnings. Best Buy would attest to that after it missed earnings estimates last week and saw its stock decline 30%.