The stock market has managed to grind higher throughout April.
Oil prices rallied, the US dollar weakened and China showed signs that its economy is stabilizing.
These three conditions are just what the market needed to breathe easier and recover from the steep declines expressed in the first quarter. As usual, the market rallied in the face of high levels of investor pessimism.
Over the past two weeks, US economic data has shown improvement.
Factory orders, services sector data, and manufacturing numbers all improved.
This past week’s employment data, both the ADP private payrolls numbers and the Department of Labor’s statistics, revealed weaker numbers than the prior month but still ok.
Interestingly, hourly wages showed a strong increase, rising at a 2.4% annualized rate from the prior year. Weak wage growth has been a chronic symptom of the US economy since the 2008-2009 financial crisis. Rising wages are a concern to those who believe higher labor costs will hurt corporate profits. However, others feel that since the US economy is 70% consumption, more money in household hands will lead to more spending.
Personally, I am in the latter camp. Households need additional income to feel, as Keynes termed, “animal spirits”. More income and better sentiment lead to more spending and if demand for goods rises, businesses are more likely to invest in plant and equipment.
Corporate earnings look backward
Long-term business capital investment has been stubbornly weak since 2008.
Europe saw better economic news as well.
China’s news was positive but weaker than the prior month.
Corporate earnings reports have been coming out and they are not particularly good. Many companies have beat their estimates but analysts have lowered the bar such that firms had much lower profits in the 1st quarter compared to last year but nevertheless still beat their estimates.
Corporate earnings are backward-looking numbers. Market bulls have to hope that April’s improved macro-economic reports will foretell better profits in the current quarter.
If the US dollar keeps declining, oil stays above $45 a barrel and better economic reports continue, stocks should make their way to new highs this year – maybe sooner than later. I think there is a good chance that we will see new highs this year.
Helping the bulls would be a Fed that does not raise rates until December. I think the Fed would like to get in one more 25bp rate hike in 2016. I think the Yellen Fed is very aware that a rate increase in June would send the US dollar soaring and as a result crimp US corporate profits.
The Fed does not want a repeat of last summer and then this past quarter’s stock market declines. If rates do stay very low for longer then stock price-earnings multiples should expand and stocks could go a lot higher.
Sentiment is still negative but we can’t rule out a positive surprise.
— Ian Green, Pendragon Capital Management
Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.