Earnings: Easy as A-B-C
To paraphrase the Jackson 5, earnings growth this quarter comes as easy as A-B-C. The alphabet today consisted of Apple (AAPL), Boeing (BA), and Caterpillar (CAT). All three had spectacular earnings reports, but investors treated Caterpillar as if it had two left feet.
The news from Apple was, if possible, even more amazing than investors expected. Quarterly profits rose 94% and sales shot up 59% as the iPhone continued taking over the world. Business in China was particularly strong, with that country now comprising 20% of the company’s sales. Boeing, meanwhile, is selling new fuel-efficient airliners as fast as it can build them. Caterpillar’s revenue surged 23%, but expectations were set at a 24% increase, so the stock got clobbered today. Nevertheless, the corporate picture is overall more encouraging than analysts expected this quarter. Companies have found ways to stay profitable even in a low-growth economy.
Today’s Federal Reserve policy statement anticipates more of the same. The FOMC “expects economic growth to remain moderate over coming quarters and then to pick up gradually” while acknowledging continued housing sector weakness. Fed officials are not troubled by higher energy and food prices, which they judge to be temporary. We will see about that.
The Fed’s failure to show enough pessimism disappointed the bond market. Fixed-income traders, knowing the Fed will offer further stimulus only if the economy stumbles significantly, sold off bonds following today’s statement. The ten-year Treasury yield briefly rose back above 2% before settling near 1.98% today.
Even without an extension of the Fed’s “Operation Twist” past its June expiration, concern about Spain seems likely to keep U.S. interest rates under control. Europe faces an uphill climb toward anything resembling growth. The rest of the world seems willing to move on.
Technology lost its grip on the lead and skidded to fifth place after a punishing week. Apple’s blow-out earnings report suggests tech may still have some life. For now, though, top billing is shared by Financials and Health Care. Consumer Discretionary is right behind. The unfolding bribery scandal at Wal Mart (WMT) created a headwind for the retailing segment. Consumer Staples and Industrials held steady in fourth and sixth place, respectively. The Utilities sector continued to revive, moving up from #9 to #7 with slightly positive momentum. Materials and Telecom slipped while Energy remained in last place.
Large Cap Growth holds the top Style ranking again this week. Within the group, weakness in Technology was offset by strength in Health Care. Mega Cap stayed in second place. Large Cap Blend moved up to third, swapping places with Mid Cap Growth. Micro Cap slipped another notch to #8, further widening the gap with Mega Cap that was so inexplicably narrow a few weeks ago. This places Micro Cap in the same neighborhood with the Small Cap groups, which continue to hold the bottom three slots. This week those three categories have the additional distinction of being the only three Styles with negative momentum readings.
The U.S. kept its top ranking for another week, but not by much. Pacific ex-Japan and the U.K. are moving up the charts quickly, and either could take the lead soon. Fourth-place World Equity is the only other global category not registering a negative momentum reading. At zero, however, its reading is not exactly bullish. Japan was joined in the middle of the pack by EAFE. Emerging Markets slipped down to #9 on the list, allowing EAFE, China, and Canada to all move ahead. Brazil remained weak and weighed down Latin America’s composite benchmark. With Spain in the process of imploding, Europe’s position in last-place looks fairly secure. The iShares MSCI Spain ETF (EWP) jumped 6% from Monday’s open through today’s open, yet it still shows a small loss for the last six market days and a five-week loss of nearly 15%. Money may be in short supply in Spain, but volatility is easily found.
“Well the exact reading for the federal funds rate today, in the absence of a nominal bound , would depend a lot on which particular rule, what particular model that you use. I don’t want to cite a particular number, but it probably would be negative.”
Federal Reserve Chairman Ben Bernanke, April 25, 2012
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