January 26th, 2014
In a holiday shortened week, the market opened higher than the previous Friday but fell a bit more than 3% by week’s end. On this same week in 2012, the market lost 2.5% in 3 trading days. As I mentioned last week, there were few economic reports this past week to detract from the focus on corporate earnings.
IBM opened up the week by beating profit estimates but missed revenue estimates by $1 billion, or about 3%, and were about $1.5 billion less than the final quarter of 2012. The 4th quarter is usually IBM’s strongest quarter each year; lower revenues from this giant indicate a cautious business investment outlook. IBM is selling for the same price now that it did in mid 2011, a price earnings ratio of 12.
The following day, China announced that the country’s industrial production has fallen just below the neutral mark. The reaction to the news was exaggerated by sharp declines in some emerging market currencies, which started a cascade of selling. See SoberLook blog for some charts. Similar weakness out of China last summer prompted a much more subdued reaction.
On Thursday, McDonald’s reported weak sales growth, which added to concerns. After a run up of 30% last year, many traders were on high alert for any negative news. The U.S. stock market has enjoyed a tail wind from Federal Reserve stimulus policy, but a global economy is largely outside of the Fed’s influence.
A 14 month support trend line that has been in place since November 2012 sets a mark at about 1760. Dropping below that would signal a short to mid term shift in market sentiment. The SP500 index closed at 1790 on Friday, 1.7% above that support trend line. The 10 month average of the index is 1700. A drop below that mark would signify a change in mid to long term sentiment. A few weeks ago, I noted that the market was close to 10% over its 10 month average. This week’s decline puts that percentage at a bit over 5%.
Existing home sales notched up a bit in December but the yearly percent gains were relatively flat. The 4 week average of new claims for unemployment declined to 331,000. Several weeks ago it was close to the psychological 350,000 mark. Mitigating the decline in new claims, continuing claims have been rising lately and are approaching the 3 million mark.
To put that 3 million people in historical perspective, take a look at the chart below.
The number of long term unemployed is ever a concern.
In early October I noted the relative sluggish performance of retail stocks vs the larger market index of the SP500 ahead of the Christmas buying season. Below is an updated chart of a retail index ETF vs the larger market.
Shortly after that post, renewed hopes for a strong Christmas season led to higher prices for the group. Disappointing sales gains announced as the season ended deflated that balloon. Since the new year began, a composite of retail stocks has lost 8%.
Typically retailers report their earnings in mid to late February. Traders have already priced in a rather disappointing earnings season for the retailers. In the context of a longer time frame, retail stocks are still up 25% year over year. If an investor had bought this composite on this date seven years ago when the economy was strong and retail stocks were at a high, she would still have doubled her money, easily outpacing the 38% gains in the larger market since then. The resilience of consumer demand, despite an extremely severe downturn when unemployment and falling house prices put a brake on consumer spending, has helped make this sector a sure footed long term winner.