As investors gear up for anotherearnings season , all signs
point to decent quarterly results.Analysts steadily lowered their
first-quarterprofit forecasts during the past few months, and in
the continuation of a multiyear trend, companies are likely to
meet or exceed that lowered bar.
In fact, the first quarter of 2012 was also quite solid --
relative to expectations. Nearly 65% of the companies in the
S&P 500 met or exceeded consensus profit forecasts. Yet that
was of little help to the broader market: From April 2, 2012,
until June 1, 2012, the S&P 500 dropped from 1,419 to 1,278
-- a nearly 10% fall.
The S&P's drop could be blamed on the tepid tone of
economic data reported by various government agencies, as the
U.S.economy appeared to worsen throughout the spring of 2012.
From the Purchasing Managers'Index (PMI) to small-business
confidence measures and gauges of consumer sentiment, the numbers
worsened over the course of the spring. (Notably, the subsequent
rebound in themarket was also tied to an improvement in economic
Now, consider the market's response this month to March's
subpar employment report, which showed that just 88,000 new jobs
were created overall. The market took a solid hit when those
numbers surfaced, but it started the next week on a more upbeat
tone once again. (Investors got an early read on the surprisingly
negative jobs outlook when the Conference Board Consumer Index
reported a nearly 12% drop in February to 59.7 in March.)
And to get all of the bad news out of the way, the National
Federation of Small Business (NFIB) reported that its
small-business optimism index fell 1.3 percentage points in March
to 89.5. The index saw its largest declines in labormarket
indicators ,inventory investment plans andsales expectations. In
its survey, the NFIB found that just 4% of small-business owners
think this is a good time to expand their operations, which is
among the lowest ever recorded in 40 years of surveys.
To be sure, the market is largely shrugging off these reports:
The S&P 500 remains within 1% of its recent peak, and appears
on the cusp of making a new52-week high on any given day. Perhaps
investors are assuming the incipient phase of economic
weaknesswill be short-lived, and the economy will perk up by
summer, as was the case in 2012. Or perhaps investors aren't even
paying attention to these economic reports. Ignorance is
But if you want to preserve anygains you've built up in this
multiyear rally, you need to keep watching the economic calendar.
Here are three key dates:
1. Tuesday, April 16: Industrial production
The Federal Reserve compiles a wide variety of industrial data
each month. Unfortunately, those data come with a considerable
For example, the mid-March reading covered economic activity
through February (which showed continued improvements that have
been underway in this gauge for the past six months). What will
the March data look like? If wenote a pullback from the 99.5
February reading, then it's a sign that weaknesses in employment,
consumer confidence and small-business optimism are starting to
spread throughout the broader economy.
2. Monday, April 22: The Chicago Fed National Activity
The CFNAI doesn't get as much as media coverage as other economic
indices, but it should. This gauge is derived from 85 distinct
inputs, giving us the broadest measure of the economy's health.
In the past six months, this gauge has been quite erratic,
swinging between negative and positive readings, which is the
result of a wide range of pushes and pulls on the economy right
now. You can read about the prior report here and you should mark
your calendar for the upcoming reading. The primary number itself
isn't all that helpful, but the Chicago Fed's in-depth discussion
of the underlying trends canyield clues about the health of the
3. Tuesday, April 30: The biggest day of the month
At the end of April, we'll see a series of economic events that
could help determine whether the adage "Sell in May and go away"
applies to this market. That's when:
- The Federal Reserve Open Market Committee (FOMC) kicks off
its two-day meetings.
- The Case/Shiller monthly housing price index is
- The Institute of Supply Management delivers its monthly PMI
- And the Conference Board provides its next snapshot of
Risks to Consider:
Remember, economic readings during a one- or two-month span
don't represent a trend. Instead, investors will want to gauge
trends during a three- to four-month time frame to confirm a
major directional change in economic winds.
Action to Take -->
My colleague Dave Goodboy recently weighed in with his own
concerns about the currentbull market , and I share many of his
views. Still, it's wise to let the economy tell us where we are
going. If the economy can manage to generate robust data sets in
coming weeks and months, then this market rally can extend even
further, as there is an ample amount of financial firepower that
is still in a "buying" mode. Nevertheless, at this point, it's
wise to maintain stop-loss limit orders and adjust your portfolio
so that it contains more valuestocks , which tend to fare better
in choppy markets.