Stock Market Takes a Breather – 4/19/13

Our thoughts and prayers are with the people impacted by the Boston Marathon Bombing and chaos thereafter.

The pullback we have been anticipating started this week.  This was triggered by a number of inconsistent economic data points combined with the shock of the attack in Boston.

The Conference Board reported that its index of leading economic indicators fell 0.1% in March, the first decline since August of last year and below the consensus growth estimate of 0.1%. First-time claims for unemployment benefit insurance rose by 4,000 to 352,000 for the week ended April 13, in line with the consensus estimate.  Once again, for the third year in a row, ISM (Institute for Supply Management) indexes are sliding as spring approaches — provoking fears of a growth slowdown in the U.S. Yet each time the economy has continued to expand, suggesting that seasonal factors are distorting the data. In the latest report, the Manufacturing and Services New Order indexes fell 6.4 and 3.6 points to 51.4 and 54.6, respectively. Inventories also weakened, but not as much. But we note that the same pattern produced a dip in the Order/Inventory spread in each of the past three years, and the economy typically recovered in the second half of the year. The ISM Services Activity Index has fluctuated in the 56.4-56.9 area in recent months, which is a strong level.  Next week we will get a first estimate of Q1 2013 GDP which will give us a better indication of the overall direction of the U.S. economy.

Global economic numbers have also been mixed as China’s GDP came in slightly below forecast at an annualized rate of 7.7% but their trade balance numbers showed internal consumption is growing which resulted in a trade deficit for the month of February.

On the earnings front we are seeing fairly good numbers thus far overall and we do not foresee any major drop off in corporate results in the near future. Earnings beat estimates at 73 percent of the 102 companies in the S&P 500 that posted results thus far this season, while 49 percent exceeded revenue projections.  Although it is early in the earnings season, it does not appear that the reversion of the payroll tax to normal levels or the increases in taxes are having a big impact on consumer spending thus far in 2013.  This is a very positive sign and suggests that the U.S. economy is gaining strength.

General Electric and McDonald’s posted earnings in line with estimates, while Verizon (VZ) posted solid first quarter results and remains the strongest wireless carrier.  GE reported a 14 percent rise in post-tax profits for the first quarter, despite a slump in its European business unit.

IBM missed average estimates as the firm’s hardware and software results disappointed.  Meanwhile, Microsoft (MSFT) and Google (GOOG) both exceeded average expectations. MSFT had revenue growth of 18 percent across all business segments and the launch of Windows 8 provides a cohesive strategy for its Windows operating system franchise to compete in the mobile and tablet space.  Google benefited from increased revenue growth in their advertising segment and Google’s rise in the smartphone market share through the Android platform should help to extend its competitive advantages into the mobile world.  Apple reports first quarter earnings Tuesday, April 23rd after market close.

The banking sector results were mixed as Citigroup (C) surpassed all estimates and Goldman Sach (GS) and Bank of American (BAC) fell in line with most estimates.  Overall, the banking sector continues to show signs of improvement as capital levels continue to improve and their balance sheets are now quite strong.  BAC is still working through a number of settlements related to the misrepresentations and claims of faulty loans sold to private and government entities, but there seems to be some visibility now as the pace of new claims against BAC continues to taper.  Only $1.8 million in new claims were made in the first quarter compared with $5.6 million in the first quarter last year.  It appears that BAC will be able to increase cash payouts to shareholders above the $5 billion share repurchases it has already planned for in 2013.  Outside of the mortgage unit, BAC’s other business segments are showing some promise and look to increase profitability going forward through scale advantages and advances in technology are starting to make the universal banking model preferable in the eyes of consumers.

If anything we would anticipate earnings getting a bit stronger heading into the third and fourth quarters of 2013 if a budget deal is reached and some of the uncertainty surrounding regulation and taxes improves.