| Weekly Wrap: It was a wild ride this week, with fears of higher interest rates one day and euphoria over earnings reports the next. The week ended with gains in the indices, but the near-term trend is still flat to up only slightly. The week started with very tame and mixed action on Monday. Then on Tuesday, Federal Reserve Chairman Greenspan testified in the afternoon to the Senate Banking Committee. He said that banks and the financial systems are well positioned to deal with higher interest rates. This did little more than confirm that the Fed is likely to raise rates later this year, but it nonetheless put the stock market into a mild panic, and the Dow fell 123 points on the day. Expectations of higher interest rates are a legitimate negative for the stock market. On Tuesday, it was all traders cared about. Through the week, however, the earnings reports kept flooding in. And they were extremely good. Almost 50% of Dow companies reported and over 35% of the S&P 500 companies. Through Friday, over 75% of these reports were above the average Wall Street forecast. That is well above the normal 60%. Total operating earnings growth is running over 3% ahead of expectations, which suggests that the final gain for the S&P 500 will be over 20% for the third straight month. Earnings guidance is very upbeat for the second quarter. There are far too many reports to cover even the big ones, but some are particularly noteworthy. On Thursday, Microsoft (MSFT) produced a stellar report, beating the average profit estimate by 5 cents, and coming in way above revenue forecasts. It was perhaps the most influential report. Other excellent reports through the week came from 3M (MMM), Altria (MO), Eli Lilly (LLY), General Motors (GM), Wells Fargo (WFC), Motorola (MOT), Coca-Cola (KO), Ford (F), eBay (EBAY), Caterpillar (CAT), and Amgen (AMGN). Also noteworthy were the impressive reports from manufacturing firms. Companies such as Danaher (DHR), Illinois Tool Works (ITW), Cummins (CMI), and Honeywell (HON) posted very strong revenue and earnings gains. The positive impact from the strong earnings numbers broke through on Thursday. The Dow gained 144 points that day and the Nasdaq jumped 37 points. The Nasdaq added another 15 points to that gain on Friday (after the Microsoft report). It outperformed the other major indices as it posted a 2.7% gain following a 2.8% drop last week. There wasn't much economic data this week. Initial claims for unemployment for the week ended April 17 fell 9,000 to 353,000, but that was very disappointing after the 32,000 increase the prior week. This suggests only a moderate gain in April nonfarm payrolls to be reported in early May. March PPI rose 0.5%, but the core rate was up only 0.2%. That continues a slightly firmer trend this year than last year for the core rate, but there is widespread recognition that inflation is up a bit, and there was little market concern over these numbers. The biggest economic news came Friday, as March durable goods new orders were up a very strong 3.4%. The February increase was revised to +3.8% from an originally reported 2.5% gain. This reflects very strong business investment. Orders in the first quarter have been strong across the board, and support expectations that real GDP for the period will be up 5% or more. In sum, it was a choppy week. The bearish impact of likely higher interest rates battled the bullish impact of strong earnings growth. This week, the earnings numbers proved more influential. Next week almost as many earnings reports are scheduled as there were this past week. Dr. Greenspan has no major scheduled speaking engagements, but that doesn't mean interest rates will be off the radar screen. The 10-year note yield closed Friday at 4.44%, up from 4.35% at the close of the prior week. A rise through 4.50% could be psychologically negative for stocks. Still, the focus will probably be on positive earnings results.Briefing.com retains a moderately bullish long-term stance. Short-term action could remain very choppy, but the long-term bullish impact of very strong earnings growth still makes a strong argument for blue chip stocks. -Briefing.com |
