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GAUGING GLOBAL GROWTH

Global growth is likely to be a recurring theme for investors this week. The health of the global economy and key regions (U.S., Eurozone, Japan, China, etc.) is likely to get plenty of attention from corporate managements as they discuss Q1 2015 results and provide guidance for the rest of the year. In addition, the International Monetary Fund (IMF) will release the spring 2015 edition of its widely read World Economic Outlook on Tuesday, April 14, 2015, and China will release its Q1 2015 gross domestic product (GDP) that same day. The outlook for global growth is important to investors, as it defines the ultimate pace of activity that creates value for countries, companies, and consumers. As investors begin to digest the S&P 500 earnings reports for the first quarter of 2015 (32 S&P 500 companies will report Q1 2015 results this week, with another 312 set to report in the final two weeks of April 2015), we provide an update on how consensus estimates for economic growth for 2015 and 2016 — in the United States and worldwide — have evolved over the past few years, and in particular, since oil prices peaked in mid-2014.We’ll also take the first look at how global growth is shaping up for 2017….

Gauging Global Growth

 

Words With Friends

Words matter. As investors brace for the unofficial start of the S&P 500 earnings reporting season for first quarter 2015. (see this week’s Weekly Market Commentary, “Earning Recesion?” April 6,2015, for detail), the financial media is swirling with words and phrases like “rig count,” “strong dollar,” “port strike,” and even “bad weather.” These earnings season buzzwords come and go, and although these words change with the seasons (remember “deleveraging,” “debt ceiling,” “Europe,” “warm weather,” “drought,” “Super Storm Sandy,” “Obamacare,” etc.), it is earnings — and earnings guidance — that ultimately drive equity prices.

Words With Friends

 

MARKET’S MARCH MADNESS

The Final Four of the 2015 NCAA College Basketball Tournament is set with Kentucky, Wisconsin, Duke, and Michigan State headed to Indianapolis to determine this year’s college hoops champion. In that spirit, we share our own Final Four for  stock market investing: the economy, earnings, valuations, and technicals. Based on our assessment of these four factors, we expect stock market investors may be “cutting down the nets” due to potential high-single-digit stock market gains in 2015…

Market’s March Madness

 

The Dollar’s Ripple Effect

In technical analysis, “intermarket analysis” looks at the way in which various markets interact. Intermarket analysis primarily looks at four maret sectors: currencies, commodities, bonds, and stocks. From a technical analyst’s perspective, focusing our attention on only one market without considering what’s happening in the others leaves us in danger of missing vital directional clues and potential profits. The dollar, which has appreciated 24.4% since June 30, 2014 (as of March 19, 2015), has had an unusually strong intermarket effect of late. Today, we look at the dollar’s recent impact on other major markets and what it means for investors froma technical perspective. Since June 2014, a strong U.S. dollar has created a tailwind for European equities, while creating headwinds for the euro and commodities, especially crude oil, as well as equity markets for commodity-exporting emerging market countries such as Brazil. (To read about the dollar’s impact on domestic equity markets, see the March 16, 2015, Weekly Market Commentary, “Dollar Strength Is a Symptom Not a Cause.”)

THE DOLLAR’S RIPPLE EFFECT

 

Dollar Strength is a Symptom Not a Cause

The massive U.S. dollar rally has wide-ranging impacts. It hurts international stock returns generated in foreign currencies. It influences global trade and the flow of investment dollars. A strong dollar hurts corporate earnings by reducing revenue earned by U.S.-based multinationals overseas in foreign currencies. It even puts downward pressure on inflation and commodity prices (including oil) and can influence monetary policy, corporate profit margins, and consumer spending. These are important considerations, but the key question investors are asking is whether the strong dollar will derail the bull market. We don’t think so, based on how stocks have done historically during strong dollar periods. But the dollar does have important implications for asset classes and sectors, as we discuss below…

Dollar Strength is a Symptom Not a Cause

Happy Birthday Bull Market

The current bull market, one of the most powerful in the S&P 500’s history, celebrates its sixth birthday today, March 9, 2015. The S&P 500 has more than tripled since the financial crisis closing low on March 9, 2009 (the index is up 206% since then), achieving a cumulative return, including dividends, of 244% (22.8% annualized). Since World War II, just three other bull markets have reached their sixth birthday, and only one (1982–1987) produced bigger gains ahead of its sixth birthday. We do not think this bull market is about to end just because it’s six years old. Bull markets do not die of old age, they die of excesses, and we do not see evidence today that economic excesses are emerging. There is still slack in labor markets despite healthy job growth in recent months. The credit markets reflect rational behavior. We see few signs of overbuilding in the commercial and residential real estate markets. Inflation (with or without the effects of depressed energy prices) remains low, which has enabled the Federal Reserve (Fed) to remain accommodative. The accommodative Fed provides further evidence of the absence of the types of excesses that have marked prior stock market peaks….

Happy Birthday Bull Market

Are Expectations Too High?

Thanks to some help from the Greece agreement reached Friday afternoon (February 20, 2015), the S&P 500 and Dow Jones Industrials Average ended last week at new record highs, while the NASDAQ has moved to within 50 points of the 5000 milestone. The market’s continued ascent has caused some to ask if the stock market reflects excessive optimism. One way to respond to that question is to look at valuations. On both trailing earnings and forward earnings estimates, we believe price-to-earnings (PE) ratios — both between 17 and 18 — are slightly rich, but not high enough for us to change our positive outlook for U.S. stocks for 2015. (For more on our 2015 stock market forecasts, please see our Outlook 2015: In Transit publication.) Another way to gauge optimism is to look at market surveys, such as the percentage of bulls from the American Association of Individual Investors (AAII), which at 72% is only slightly above the long-term average range of 60 – 65% and not excessively optimistic. Finally, earnings and economic surprises also indicate that investor expectations remain reasonable…..

Are Expectations Too High?

 

Energy Sector Outlook: What We Are Watching

No sector is getting more attention right now than energy. Market participants are attracted to the potential upside after both oil and the energy sector suffered substantial declines in recent months. Many see the sector as cheap, something that is not easy to find these days in the U.S. equity market. We drive by gas stations every day where we see prices have been cut in half, serving as a constant reminder of how cheap oil is. In this commentary, we discuss what we are watching to assess the opportunity in energy….

Energy Sector Outlook What We Are Watching

EARNINGS SEASON HIGHLIGHTS AND LOWLIGHTS

Despite the massive drag from the energy sector and the negative impact of a strong U.S. dollar, fourth quarter 2014 earnings are on track to exceed the prior Thomson-tracked consensus estimate of 4.2% (as of quarter end on December 31, 2014). In fact, despite a slow start, earnings growth for the quarter (after all 500 companies have reported) should approach 7%, reaching the average
historical upside surprise of 3%. As of February 6, 2015, with about two-thirds of S&P 500 companies having reported, S&P 500 earnings were on track for a 6.4% year-over-year increase for the quarter according to Thomson. In this commentary we look at some of the highlights and lowlights of this earnings season as it enters the home stretch.

HIGHLIGHTS
Industrials defying skeptics. The industrials sector had many skeptics coming into this earnings season. The sector is one of the most global and was expected to see among the biggest negative currency impacts, both in terms of translation of foreign profits and pricier U.S. exports (a strong dollar makes imports more expensive for foreign buyers). A significant portion of energy capital spending flows to the sector, so reductions in oil exploration and production investment have negatively impacted the industrials sector. Lackluster economic growth in Europe and slowing growth in China add to the challenges. But strength in North America and expanding profit margins helped offset the drags, and industrials are on pace for 12% earnings growth in the quarter, 2% above prior expectations as of quarter end. Although guidance has led to estimate reductions, as it often does for all sectors, 2015 estimates are still calling for a solid 7% earnings gain compared with
2014. Our industrials sector outlook remains positive. Technology producing big upside surprise. The technology sector is on pace for a solid 17% year-over-year gain in fourth quarter earnings, nearly double the prior 9% expectation, representing the biggest upside surprise among all 10 equity….

Earnings Season Highlights 2015.2.10

DON’T FRET ABOUT JANUARY EFFECT

The stock market declined in January 2015, causing some to ask whether the so-called January effect (or what some call the January barometer) meansthat stocks will fall this year. One of the best known Wall Street adages, “as  January goes, so goes the year,” has a good track record when January is positive, but it is mixed otherwise. Although we always put fundamentals first in trying to forecast market direction, in this commentary we look at January market patterns and posit that the January dip may not be a reason to fret about the stock market in 2015. The so-called January effect, or January barometer, has a strong track record in that positive Januaries for the S&P 500 have preceded positive years 90% of the time since 1950, with an average calendar year gain of 16.9%.

MIXED TRACK RECORD FOR JANUARY EFFECT

The so-called January effect, or January barometer, has a strong track record in that positive Januaries for the S&P 500 have preceded positive years 90% of the timesince 1950, with an average calendar year gain of 16.9%…..

 Dont Fret About January