Monday, May 16, 2011
Last week’s erratic trading behavior reflected concerns about the health of the economy. This prompted exists from the more economically sensitive corners of the market, such as commodity and basic material stocks.
Benefiting from this lowering of risk appetite were the more defensive groups, such as healthcare, staples and utilities. This sectoral rotation notwithstanding, the broader stock market has been under pressure as growth concerns have taken center stage. This morning’s soft Empire State report only confirms those concerns.
With the first quarter earnings season almost over and the economic calendar on the relatively thin side this week, I would expect these concerns to remain with us today and the rest of this week.
But beyond the summer doldrums, the outlook for the market remains favorable, driven by continued strength in corporate profitability and a still supportive interest rate backdrop.
The completion of the Fed’s quantitative easing program next month does not mean the start of a tightening cycle. Before the Fed starts raising interest rates, most likely a 2012 event, they will stop reinvesting the proceeds from the maturing mortgage bonds on their balance sheet. As such, the monetary backdrop will remain favorable for the stock market for quite some time even as the QE2 program ends.
As the economic clouds lift over the coming weeks, the market will refocus its attention on earnings power, which is by far the biggest driver of stocks. With an impressive first quarter earnings season coming to an end, the earnings picture remains very strong.
Among earnings reports this morning, we got a weaker-than-expect report from Lowe’s (LOW) this morning. But J.C. Penney (JCP) came out ahead of expectations and raised guidance for the year. In other corporate news, DuPont (DD) completed its tender offer for Danish food ingredients and enzymes maker Danisco. The chemicals giant had announced the acquisition late last year for $6.5 billion in cash.
Sheraz Mian
Director of Research
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