Rally Time

“Now is the winter of our discontent made glorious summer.” – William Shakespeare, Richard III

The first-quarter earnings rally is officially underway, helped along by what many thought to be dovish remarks on Wednesday by Federal Reserve chair Janet Yellen. Stocks won’t be up every day of course, and there will likely be some Ukraine-related drops, but the general direction of stocks should remain upward over the next few weeks, enough to carry us past 1900 on the S&P 500.

Earnings reports have been mixed, but the early going has been that way for a few years now. There is no reason as yet to expect that the season will fall short of the usual rate of about two-thirds of all companies reporting results that beat estimates.

That fact alone tends to produce a drumbeat of triumph that however contrived, tends to drown out other noise during its run. The S&P 500 is only about 2% away from closing over 1900, and was able to rise more than that just last week.

We will likely be close to 1925 when the Fed’s policy-making committee, the FOMC, issues its latest statement on the final day of April. It will issue a self-satisfied assessment that the taper ought to continue and note encouraging trends in manufacturing and industrial production, while noting that the labor market still has a long way to go (i.e., lots more ZIRP in the future). Talking heads will come on and assure us that this time the economy will really accelerate, corporate profit forecasts will come true, the Fed has your back, and you always have to be in the stock market.

But it won’t be the time to put new money to work. I wish all MarketWeek readers a pleasant holiday weekend, noting that while many markets, including the U.S., were closed on Friday, many more will be closed in honor of Easter Monday – though not the U.S.

The Economic Beat

The week led off with the March retail sales report, which beat estimates of a monthly gain for 1% with 1.1%. This was given quite a warm reception in the business media as nullifying the notion of any non-weather weakness in recent months, but the report was really not that strong. Neither the year-on-year, quarter-on-quarter or trailing-twelve month growth rates showed any improvement – in fact they all declined, with the first two sporting growth rates near 2% and the latter dropping under 4%. I do expect some weather-related rebound that will get additional aid from the Easter holiday, but the inevitable celebratory chest-thumping may end up being ill-founded. One month does not make a trend, a rule that Wall Street likes to ignore when convenience dictates.

Manufacturing turned in a performance that was mixed but on balance positive. The New York Fed survey went sideways with a reading just over 1, but the Philadelphia survey had a good reading of 16.6 and the March industrial production report showed strong upward revisions to February on top of a decent March. It was centered on autos and utilities, but good across the board nonetheless. Next week will see reports from Richmond and Kansas City, as well as March durable goods and the Chicago Fed national activity index.

Housing was not so fortunate. Starts did rise from February, but the first quarter of 2014 is showing a small decline from the first quarter of last year, with even the weather-unaffected Western region flat. The sentiment index remained below 50. Next week will be dominated by earnings, but we there will also be existing and new home sales that are likely to bear out the current subdued rates.

Weekly jobless claims reached their usual ebb at the end of the first quarter, but are not otherwise showing any changes in trend. First quarter claims declined by a bit more than 6% from the prior year, suggesting that the first half will be closer to 5% (claims run higher in the second and fourth quarters, even with seasonal adjustments). Be careful about assuming that diminishing claims mean an even stronger recovery is following – they bottom out at the ends of economic cycles, not in the middle.