from Briefing:
Weekly Wrap
Roller coaster rides at amusement parks can be great fun. In the stock market, they can be wrenching.
This past week, the stock market roller coaster continued. The market rose on Monday and Tuesday after a sharp decline the previous Friday. But on Wednesday, the Dow plunged 115 points and the S&P dropped 15 to the lowest level of the year. On Thursday, however, the market rallied big time, with the Dow surging 206 points and the S&P 22. Friday saw fairly stable action at first, but increased volatility in late afternoon that led to a day of losses.
The dramatic action is a result of the conflicting forces of fears over rising inflation and the benefit of still strong earnings growth. Slower economic growth is also widely expected, but the uncertain degree of the slowdown is also causing stock market turbulence.
The main problem for the stock market is the undeniable fact that inflationary pressures are increasing. This week, the catalyst setting off the worst reaction to those fears was the Wednesday report that the core rate of CPI in March rose 0.4%. That was well above the expected 0.2% increase, and followed on a 0.3% February increase. These levels are up sharply from a year ago.
The release of the Federal Reserve Beige Book later that day poured more fuel on the fire. The trends from the Federal Reserve districts, based on anecdotal reports, were that "upward price pressures have strengthened" and that "high energy prices were already, or could soon be, damping consumer demand."
This really says nothing new. Market participants are well aware of these conditions. Nevertheless, the comments from the Fed compounded the fears generated by the CPI report.
The earnings reports helped offset this negative sentiment. About one-third of the S&P 500 companies reported this week, and the trend is excellent. Operating earnings in aggregate are on track for 12% growth. That compares with expectations of 7% growth just a few weeks ago.
First quarter earnings are coming in well above expectations, and guidance for the second quarter has been encouraging.
Noteworthy strong reports this week included 3M, Bank of America, Eli Lilley, Parker-Hannifin, Sun Trust Banks, Texas Instruments, Coca-Cola, Johnson & Johnson, Merrill Lynch, Pfizer, Viacom, Intel, Altria, Caterpillar, Honeywell, JP Morgan Chase, United Technologies, Allstate, eBay, Motorola, AT&T, Baxter, Cummins, Whirlpool, Amgen, Google, and International Paper. That is an impressive list of companies that all beat expectations.
The economic data this week was limited. March PPI provided a rare positive note on inflation, as the core rate was up only 0.1%. March housing starts dropped from high February levels. Initial claims fell, but that may have been due to seasonal adjustment problems. The Philadelphia Fed manufacturing index was a surprisingly strong 25.3. This contrasted with the similar NY Empire State Index which was a weak 3.1. The degree that economic growth has slowed is a matter of debate that this week's data did little to settle.
The yield on the 10-yr note over the past week was essentially stable, rising modestly from 4.27% to 4.28%. Oil prices rose from $50.49 a barrel to $55.50. That had some minor impact, but there had been little talk that oil would go below $50.
For the week, stocks were up. Score one for the strong earnings reports. Next week brings even more reports, with plenty of big names on tap. There are no inflation reports, and no major economic reports.
Perhaps the market can sustain some of the upswing that developed this past week. But downswings are still likely in the near future as well. Until the market perceives that the Fed has inflation back under control, the wild ride is likely to continue. |
