Markets Finished the Week Mixed…2/8/13

Markets Finished the Week Mixed…

Equities were mixed this week as investors digested macro news from overseas and continued solid earnings reports.  Of the 341 companies in the S&P 500 that have reported earnings thus far, 75 percent have topped earnings estimates compared with the 62 percent average since 1994 and the 65 percent average over the past four quarters. In addition, 67 percent have exceeded revenue expectations.  We are starting to see a steady stream of organic revenue growth which should bolster investor confidence going forward.

The U.S. trade deficit narrowed by over 20% to $38.5 billion in the fourth quarter, suggesting the economy most likely expanded even as military spending dropped the most since the Vietnam era.  This was largely due to oil exports reaching record level highs while the amount of oil imports decreased.  A weaker U.S. dollar also made American exports more attractive to overseas purchasers.  These results are very encouraging and suggest the global economy is improving.  U.S. corporations that have a global product reach should benefit from the improving global growth.

Overseas

In Europe, recent optimism was shaken as renewed concerns over “near term” economic weakness were expressed in comments made by European Central Bank President Mario Draghi this week.  He did go on to say that he believes economic activity should recover at a gradual pace later this year as the ECB maintains its accommodative monetary stance.

China continues to show signs of growth as both exports and imports rose strongly in January.  Early GDP estimates are showing that the world’s second largest economy accelerated in the fourth quarter.  This continued improvement in growth should quell predictions of a “hard landing” in China.  China’s economy is expected to have grown at 7.8% in 2012.

Obstacles and Opportunities

Expectations that Washington will come together to avoid the automatic spending cuts scheduled to take place over next several months continue to fade.  This could have a negative impact on the US economy in the short term.  Even as companies continue to produce solid earnings while holding record levels of cash, we face several headwinds that could lead to “roller coaster” type swings in financial markets.   With the “fiscal cliff” fiasco behind us the next hurdle we face is the debt ceiling debate that has been postponed through May 18th.  The House and Senate have until tax day, April 15th to pass fiscal 2014 budget resolutions.  If they fail to do so they will see their pay suspended.  However this would only be a temporary setback as their pay will be held in escrow and paid out a later date after a resolution is approved.

Investors have become accustomed to these 11th hour resolutions that have thus far managed to avoid causing major economic turmoil.  They will need to keep these last minute agreements going in order for the economy and markets to continue moving forward.

Overheard

Reports out of Washington have hinted that a proposal may be in place to have mandatory employee savings for companies with 10 or more employees.  The savings would be an automatic 3% deferral rate into a Roth IRA (after-tax) savings vehicle.  This is in the very early phases of discussion and we will continue to monitor and update this development.

Miscellaneous

The housing market continues to show signs of improvement as prices seem to have leveled off and even increase in some markets.  However the level of housing starts is far off from its peak in 2007.  On a personal note, my wife and I sold our home on the first day of showings this past weekend.  Hopefully this is a sign of good things to come.