Stocks Overcome a Post-1930s Record


The market staged a second-straight weekly rally, despite Friday's dismal payroll report and some other fairly downbeat economic indicators. We have now erased nearly all of the 7.2% springtime correction. In fact, this bull market has overcome eight different corrections of 5% or more during the last 28 months. That is a 73-year (post-Depression) record of "new buying opportunities" within a single bull market. And now we begin a new earnings reporting season this week, giving stocks another boost.

The other economic news last week was equally "mixed" (conflicting). On Wednesday, the Institute for Supply Management (ISM) reported that the service sector grew at a slower pace in June. Specifically, the ISM index slipped to 53.3, down from 54.6 in May. This slowdown in services is apparently a global trend, since similar surveys in Britain and China have also contracted recently. However, there is a bright side to the service slowdown: 15 of the 18 services sectors tracked by ISM improved in June, and the ISM employment index, which reflects hiring plans, rose slightly to 54.1 in June, up from 54.0 in May.

A Strong New Earnings Season is about to Begin

A big reason for the stock market's recovery in the last two weeks is the advent of earnings reporting season this week. I can already hear a "buzz" developing about which companies will post the strongest earnings results, as it is becoming increasingly apparent to Wall Street that corporate profits continue to recover dramatically, due to (1) strong growth in emerging markets, (2) a weak U.S. dollar, which boosts earnings for multi-national companies, and (3) relentless corporate stock buybacks that boost underlying earnings per share. The S&P 500′s second quarter earnings are forecasted to rise by 13.6%, compared with the same quarter a year ago, despite increasingly more difficult year-over-year profit comparisons.

This rise in corporate earnings explains why the stock market can go up even while we hear about high jobless rates and fears of a "double-dip" slowdown within the U.S. With global markets growing so fast and the dollar weakening, U.S. exports are more attractive overseas, where there is rapidly rising demand due to the somewhat "overheated" growth rates in China, India, Brazil and other developing markets.

One example is corn, a key U.S. agricultural export. After corn staged its biggest weekly decline in 15 years a couple of weeks ago, China suddenly bought 540,000 metric tons of corn for delivery later this year, according to the U.S. Department of Agriculture (USDA). This massive purchase stopped corn's price decline in its tracks. Then, a flurry of other big corn purchases (to "undisclosed destinations") kept the price of corn rising. As a result, the recent reprieve in food price inflation seems to be dissipating fast.

Don't forget that China has suffered its worst drought in 200 years. Due to the efficiency of U.S. mega-farms, plus the recent ethanol subsidies, America is the corn capital of the world. China is now effectively forced to import more corn, soybeans and wheat from the U.S. The Chinese also need more feed for their pigs, which eat a lot of grain. This trend will undoubtedly shrink the U.S. trade deficit in future months.

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 , Stocks

Referenced Stocks: ISM

Louis Navellier

Louis Navellier

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