by Shawn Narancich, CFA
Vice President of Research
A Lack of Follow-Through Stocks suffered their first back-to-back weekly declines since last fall as investors reacted coolly to the first trickle of first quarter earnings reports amid a preponderance of disappointing economic data. Despite unemployment falling to 8.2 percent in March, the monthly jobs report showed net job gains substantially undershooting expectations. A surprising increase in weekly unemployment claims also failed to inspire investor confidence. Nevertheless, several economists are raising their estimates for first quarter GDP following February data showing a smaller than anticipated trade deficit. After booking strong first quarter gains, stocks feel tired and investors appear prone to taking a glass half empty view of information flow, particularly with Europe back in the headlines and China reporting its weakest quarterly growth since 2009. The silver lining for China is monetary policy, which represents a put option for equity investors who witnessed another small move this week by the People’s Bank of China to ease the required reserve ratio for large banks. With inflation there having cooled, Chinese stocks rallied on the news. Domestically, the decline in stocks produced additional gains for bonds, pushing the yield on benchmark 10-year Treasuries back below 2 percent.
Ready or Not, Here They Come In what might be described as a case of buying the rumor and selling the news, earnings season began with a resounding thud. Basic materials bellwether Alcoa kicked things off Tuesday by reporting profits buoyed by strength in aerospace and automotive markets when investors were expecting a loss. While the good news for Alcoa resulted in follow-through for the stock, the result for other early reporters was more akin to the North Korean rocket launch. Burgeoning mortgage loan fees and better capital market results underpinned earnings beats for both J.P. Morgan and Wells Fargo, but both stocks declined and underperformed their sector benchmark after registering strong first quarter gains.
Profitless Prosperity? Then there’s Google, where earnings swept past estimates on moderating headcount gains that boosted margins. However, investors were more concerned by accelerating erosion in the company’s key “cost per click” metric, or the revenue that Google receives when Internet surfers click on ads accompanying search results. This pricing is under pressure as the mix of Google’s business shifts to mobile search, where advertisers pay less for click-throughs on smart phones. The irony here is that Google has been a key player in developing the mobile Internet with its company-sponsored Android operating system. Investors will have many more earnings reports to parse next week when 91 companies reports first quarter results.
Our Takeaways from the Week
- Following strong first quarter gains, stocks are taking a breather amid weaker economic data and festering debt issues inEurope
- Investors are greeting early first quarter earnings reports in tepid fashion