More Bumps Ahead as Earnings Season Gets Underway
Say goodbye to the smooth sailing of the first quarter.
Nearly a fifth of the S&P 500 report next week, including big blue chips — IBM, Microsoft, Coca-Cola, and McDonald’s — as well as banks, like Citigroup and Bank of America. On the economic front, there are March retail sales, industrial production, existing home sales and weekly jobless claims.
“We’re getting a peek here into the higher volatility that I think we can expect in the months ahead,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. Grohowski expects seasonal factors to affect trading.
“When you look at ‘sell in May, and go away,’ and you look at what happened last year, it’s unrealistic to think investors are not going to be looking at that…I think this year is going to be true to that historical pattern,” he said. The so-called “sell in May” phenomena was true for the market last year, when stocks made their highs for the year in April and then ended flat after a choppy summer and early fall.
“On the plus side, we still see valuations as being nicely supportive for this market, and we’re not maybe as concerned as some for first quarter (earnings) here,” said Grohowski. “I think first-quarter earnings could surprise to the upside. I think 3 to 5 percent is the best guess for first quarter operating earnings growth.”
Stocks fell for a second week, in the most volatile week of the year, punctuated by big swings in both directions. The Dow fell 1.6 percent to 12,849, and the S&P 500fell nearly 2 percent to 1370, a key technical area. At its low of the past week, the S&P 500 was off 4.6 percent, from its recent high, and down for two weeks in a row, for the first time since November.
“I think this is the first time since October, where we’ve woken up, and the reality is that stocks are typically volatile, despite zero volatility in the first quarter,” said Art Hogan of Lazard Capital Markets.
“It’s possible we could double what we’ve done already” in terms of the market decline, said Hogan. He said the stock market runs the risks of weaker U.S. data; a slowdown in China, and the European debt saga becoming more threatening.
As for China, “the import export and GDP numbers came and went, and, oh by the way, GDP is 8.1 percent. The sky’s not falling and they already started easing, knowing the slowdown was coming,” Hogan said. Economists had expected China GDP of 8.4 percent.
“The biggest wild card is the euro zone,” he said. Europe in the past week moved back onto the list of market worries in a big way, when yields in Italy and Spain shot higher, amid fiscal concerns and low prospects for economic growth.
Europe will stay in the headlines, as Spain issues bills Tuesday and longer-dated securities Thursday, and investors will watch to see if the auctions go better than Spain’s weak auction of several weeks ago. Also, European Central Bank President Mario Draghi speaks at the ECB statistics conference on Tuesday morning.
“I think we’re in a period of gradual underperformance of the year,” said Jens Nordvig, global head of G-10 foreign exchange strategy at Nomura. “And clearly things deteriorated quite fast around Spain. So, clearly those auctions are going to be quite important. I wouldn’t be surprised if they’re a catalyst for some weakness in some equities markets around Europe.”
The 10-year Treasury yieldfell back below 2 percent for the first time since early March in the past week, as investors became more concerned about global growth with Europe a concern, and unevenness in U.S. data. Weekly jobless claimswere a surprising negative, coming in at 380,000, about 30,000 higher than expected.
So claims data, industrial production and Monday’s retail sales are the important numbers to watch in the coming week.
“We don’t know how much the unseasonable warm winter months pulled sales forward,” said Hogan. Retail sales are expected to rise 0.4 percent, compared to February’s 1.1 percent.
Greg Peters, global head of fixed income research at Morgan Stanley, said he expects to see Treasurys stay in a range with about 2.20 percent the top for the 10-year yield, for now.
“We’re definitely cautious,” he said. “I still think we’re in this difficult regimen with high uncertainty from Europe, the U.S. economic picture and China is very much a mixed picture. It’s hard to have a high level of conviction here, but I think you’ll see weaker (risk) markets.
“And valuations are a lot more stretched, not problematic, but much more stretched ... so, we took a significant amount of risk off the table a few weeks ago and it still feels like you’ve got downside here,” Peters said.
Grohowski said Treasurys are not necessarily a good alternative for some investors while stocks trade choppily. “Another thing we’re warning our clients about is the perceived safety of government bonds here. Not for the next quarter or two, but it doesn’t take a significant backup in yields to completely obliterate that 2 percent yield and turn that return into a negative return,” he said.
He said a risk for markets will also come when Congress begins dealing with deficit reductions later in the year. “I think the focus on the election; the fiscal cliff; and seasonality. Those are the reasons it’s going to be a tougher slog this quarter. I think we come out of this around the election,” he said.
Grohowski said investors remain cynical about the stock market. “All the market has done is tracked earnings. There’s been zero [price-earnings ratio] expansion. Earnings have doubled in the last three years. The market has doubled in the last three years. If investors were feeling better about things, you wouldn’t have a market trading at 13.5 percent multiple when the 10-year Treasury is at 2 percent,” he said, adding that he still expects the S&P to end the year at 1450 to 1500.
What to Watch
Earnings: Citigroup, Gannett, Mattel, Charles Schwab
0830 am Retail sales
0830 am Empire State survey
0900 am Treasury international capital flows
1000 am NAHB survey
1000 am Business inventories
Earnings: Coca-Cola, Johnson & Johnson, Goldman Sachs, State Street, Northern Trust, US Bancorp, IBM, Intel, Yahoo, Intuitive Surgical
0830 am Housing starts
0915 am Industrial production
Earnings: BlackRock, Abbott Labs, Halliburton, PNC, Textron, St. Jude Medical, Yum Brands, Qualcomm, eBay, Noble Corp, Marriott, Sallie Mae, F5 Networks
0700 am Mortgage Applications
1030 am EIA Oil inventories
Earnings: Bank of America, Morgan Stanley, Verizon, DuPont, Travelers, Nokia, Peabody Energy, Union Pacific, Phillip Morris, PPG, Microsoft, Capital One, Altera, Chipotle Mexican Grill, Chubb, ETrade, Diamond Offshore, Sherwin-Williams, Genuine Parts, Baxter, BB&T
0830 am Initial claims
1000 am Existing home sales
1000 am Philadelphia Fed survey
1000 am Leading indicators
1030 am EIA natural gas inventories
1630 pm Fed balance sheet
Earnings: General Electric, McDonald’s, Schlumberger, Under Armour, Honeywell, Johnson Controls, Kimberly-Clark