Tuesday, November 12, 2013
It's all about the Fed at this stage. Specifically, the market's
assessment of when the Fed will start the QE Taper will determine
whether stocks can sustain the momentum into the final weeks of
the year. The market's earlier confidence in April 2014 as the
likely time for that decision has wavered a bit following last
Friday's surprisingly strong jobs report.
Recent movements in treasury bonds and foreign exchange
markets clearly indicate that investors are unwilling to take the
December Taper completely off the table. This all makes sense as
the U.S. economy has been showing a lot more resilience than many
would expect following the shutdown. The jobs report wasn't the
only piece of encouraging data that we have seen in recent days -
the Q3 GDP growth came in better than expected, notwithstanding
the report's relatively shakier internals, and the two ISM
surveys pointed towards steady expansion in both manufacturing as
well as services.
We will have more data before the Fed's next meeting. We will get
a sense of consumer spending trends in the coming weeks as the
holiday shopping season gets underway and we will also get
another jobs report early next month. My sense is that if we
don't see any deterioration in economic data by the time of the
December Fed meeting, then it makes perfect sense for Bernanke to
start unwinding the QE in his last meeting as Chairman. If
nothing else, it will cement his legacy and make life a lot
easier for Janet Yellen, whose Senate confirmation hearings start
this week. Given Yellen's longstanding insider status, those
hearings aren't expected to produce any surprises though the
markets will be closely following them.
On the earnings front, results from homebuilder
) came modestly short of expectations on both the top- and
) handily beat expectations, while
) missed expectations after the close on Monday. Including these
results, we now have Q3 reports from 452 S&P members or 90.4%
of the index's total membership.
Total earnings for these 452 companies are up +4.7%, with 65%
coming ahead of consensus earnings expectations. Total revenues
are up +3.1% and 42.7% are beating top-line expectations. The
composite earnings and revenue growth rates for Q3, combining the
results for the 452 companies that have reported with the 48
still to come, are +4.4% and +2.9%, respectively.
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This has been an overall positive earnings season, with the
earnings and revenue growth rate modestly accelerating from the
first half's growth pace. But most companies have continued to
guide lower, prompting estimates for the coming quarters to come
down. Investors haven't cared much in the past in response to
this downshift in earnings estimates. But it will be interesting
to see if they will continue with that trend going forward,
particularly after the Fed starts getting out of the QE business.
Director of Research