July 10: Is Tapering No Longer a Hurdle for Stocks? - Economic Highlights

By
A A A

Stocks are within striking distance of reclaiming the all-time high reached less than two months back, with the pullback resulting concerns that the Fed was getting ready to pare back its QE program. We will get more clarity on the Fed question this afternoon with the release of the minutes of the Fed's June meeting. Also at play in today's session are renewed concerns about China's growth outlook after another weak economic reading - this time about that country's exports.

The stock market's ability to claw back its losses over the last few weeks despite the persistent rise in benchmark treasury yields, is very impressive. My sense is that these gains will prove sustainable only if they reflect investors' collective judgment that an improved economic outlook trumps less Fed QE and somewhat higher interest rates. But if the market's gains reflect the hope that 'Tapering' was not imminent, then we may be at risk of giving all of these back in the coming days.

I continue to believe that U.S. economic outlook was stable enough to allow the Fed to start pulling back from its QE program later this year. A number of Fed officials went out of their way to dial back Bernanke's fairly explicit pronouncements on the 'Taper' question. But the bond market got it right from the get go, pushing 10-year treasury yields by almost 100 basis points since early May. This afternoon's minutes of the June FOMC meeting will likely confirm that Bernanke's comments were more in-line with the emerging majority on the committee.

With respect to China's growth outlook, Alcoa ( AA ) appeared to be reassuringly explicit in its earnings release on Monday, belying concerns raised by a host of weak economic readings in recent days. But today's official export numbers run counter to Alcoa's claims and raise further doubts about that country's picture. The decline in Chinese exports in June, the first in a non-holiday month since late 2009, is likely not a one-off event and likely reflective of some loss of competitiveness for China's export sector. Competitiveness has suffered to some extent relative to lower wage regional countries like Vietnam as a result of rising wages and unfavorable exchange rate movements. The continued economic problems in Europe also remain a headwind, as the more than 8% drop in exports to Europe reconfirm.

The China growth question magnifies similar concerns about the rest of the emerging world as the recent growth downgrade by the IMF shows. The China issue will figure prominently in the Yum Brand' s ( YUM ) earnings release later today as well, though YUM is dealing with a number of company-specific issues that are not directly tied to China's growth outlook.

But the fact remains that a big part of the expected earnings growth in the second half of the 2013 and full year 2014 for the S&P 500 as a whole is contingent on improved economic growth beyond the U.S. borders. For context, keep in mind that consensus earnings expectations are looking for earnings growth to accelerate from the first-half 2013's less than +3% pace to more than +9% rate in the second half and accelerate even further to more than +11% in 2014. With more than 40% of S&P 500 earnings coming from international markets, those growth expectations will likely need to be scaled back



ALCOA INC (AA): Free Stock Analysis Report

YUM! BRANDS INC (YUM): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy

Referenced Stocks: AA , YUM

Zacks.com

Zacks.com

More from Zacks.com:

Related Videos

Stocks

Referenced

80%
70%

Most Active by Volume

41,025,460
  • $10.515 ▲ 12.46%
38,766,512
  • $103.399 ▲ 0.88%
35,467,673
  • $16.15 ▲ 0.37%
33,146,865
  • $20.665 ▲ 5.60%
25,590,046
  • $12.625 ▲ 8.09%
23,692,114
  • $76.16 ▲ 1.79%
21,191,891
  • $50.7499 ▲ 2.01%
18,751,704
  • $34.51 ▼ 1.17%
As of 9/2/2014, 02:12 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com