Raise your hand if you thought that the market could go higher at the 2:15pm time of the F.O.M.C. statement yesterday, considering what the track record of the market is after they make a statement and also due to the fact that stocks were a bit historically overbought considering that the S&P was off to its best start to a year since 1989, with a 5.3% gain. And if you did raise your hand, then the late market action did not turn out the way you thought it was going to because as usual, the market did go lower after what they said, not that it was terrible or anything, but this is what the market does after the Fed or Bernanke says something, at least for the very near term.
The Dow began the day with a small loss and then did what it usually has done lately, namely turn that lower start into a positive, as it reached a 12 point gain at 9:45am, which unfortunately turned out to be the high that it would attain for the day. From that point on, it vacillated on either side of unchanged and was 5 points lower when the F.O.M.C. statement was released. And sure enough, from the time of that statement into the close, things drifted to the downside and the Dow finally ended with a closing loss of 44 points.
Breadth numbers were at a negative 1 to 2 ratio and were tilting toward the weaker side even before the major averages gave way at the end of the day and the VIX made an astounding gain of 1.01 all the way up to 14.32, and this is getting really whacky in the sense that the last time it was this high was on January 3rd when the S&P was 1459 versus the 1502 level that it closed at yesterday.
Energy stocks were on the weak side after having done extremely well to start the year, and the Dow Jones Transportation Average finally gave it up after having reached record highs in the process of being ahead for 11 straight sessions.
Outside markets did well on what the Fed had to say because they are not about to end their latest stimulus program, which continued to weaken the dollar (which is what they want) and as a result the Euro rose all the way up to 1.357, its highest level since October 2011 and naturally crude oil could not resist the temptation to go to even higher prices than it had already been at, as it now reached the $98 a barrel level, and if a person thinks that stocks will continue to advance if crude remains above $100, history shows that this is not the case, so how are these higher energy prices supposed to do anything beneficial for equities? And even gold got into the upside act, but still remains within its somewhat long-standing boring trading range, sort of going nowhere in the process.
So what did the Fed say to cause the market to go lower, as it invariably does after another one of their statements? They did leave in place their monthly bond buying program of $85 billion, as they continued to maintain that support was needed to lower the unemployment rate even as they indicated that a recent stall in the U.S. economy was likely temporary. They predicted that the job market would continue to improve at a “modest pace” and repeated their pledge to keep purchasing securities until the employment outlook “improves substantially.” They said that “growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.” Why the market sells off after the F.O.M.C. says something is a bit strange, but it is somewhat of a regular pattern and perhaps the market was just looking for an excuse to go lower in any event after the historic gains to start the year. In fact, this statement was a little more optimistic than their last one in December when they were ostensibly more “concerned” about the job market.
Despite the ADP prediction for 192,000 private sector jobs in tomorrow’s payroll report, which is perhaps a bit too optimistic, the market was under pressure from the first estimate of fourth-quarter 2012 G.D.P. which came in with a 0.1% decline when a gain of 1.1% was projected by all of the experts.
This was the worst performance since the second-quarter of 2009 as the economy began to recover from the most devastating recession since the Great Depression of the 1930’s. But closer examination of the numbers shows that there were good points as well, as for instance consumer spending, which accounts for 70% of economic growth, rose by 2.2%, which was an improvement over the prior quarter. Business investment increased by a large 8.8% and residential construction also added to the numbers. But there are quirks in the way that the numbers are calculated, and unfortunately declines in inventories subtracted 1.1% from the result. Also hurting was a decline in government spending, which subtracted 1.3% from G.D.P. and this was highlighted by a huge 22% decline in defense spending, the largest on record. Weaker exports also were a negative factor and this was the result of fewer shipments to weaker economies in other parts of the world.
Today’s market is very mixed, as the Dow started out lower by 30 points, then turned around to its best intraday level with a 30 point gain at 10am after the release of the January Chicago Purchasing Managers’ Survey, which rose by more than expected. There was also a good report on December personal income which rose by the largest amount in eight years, a gain of 2.6% but personal spending was slightly lower than expectations with a 0.2% advance. Weekly jobless claims rose by 38,000 up to 368,000 but this was not the survey week that will be used in tomorrow’s jobs report.
From those early highs, similar to yesterday so far, the Dow proceeded to decline to its low of the day with a 40 point loss at 11:30am, from which level it has improved a bit, lower by 20 as this is being written. But the market internals are decidedly mixed, as for instance breadth numbers are actually positive at a 15/14 ratio due to gains in the Russell 2000 small-cap index and mid-cap indexes as well, in addition to the Dow Transports which are nominally higher after selling off sharply yesterday. And even the Nasdaq is currently ahead by 2 points although it is not led by the usual suspects, and is rather getting support from earnings-related gains in QCOM, CTXS and VIAB in addition to advances in GOOG, SNDK and JNPR. The shares of AMZN are selling off after their supposedly good results yesterday, which resulted in a complete wipeout for options buyers in both calls and puts, which were extremely overvalued ahead of the numbers and the same thing is taking place today with the shares of FB, which also had huge overvaluation of its options as well and both call and put buyers are being taken to the cleaners as the stock is currently trading with modest changes from yesterday’s close. More on both of these tomorrow when we do our usual weekly option buying disaster summary.
The VIX is cooling off a bit, as it should given this level of the Dow and S&P, and is nominally lower by .07 to 14.25. The Euro continues to maintain itself at higher levels as mentioned earlier on the perception of the Fed keeping rates low for a still-long time but at least crude oil is coming off a bit, down to $97.50 and gold, which has really showed nothing lately, is lower as well. Bond yields on the 10-year Treasury are just below the 2% level as they await tomorrow’s payroll numbers.
All of this ahead of tomorrow’s always important jobs report, which has the consensus for a gain of 165,000, but let us also remember that there are other components to it, as for instance the unemployment rate which is projected to remain at 7.8% and there are also revisions to the prior two months as well as the statistics for the average work week and hourly earnings. One would like to think that with the market having cooled off a bit this week, with the S&P actually two points lower, that the bar for further gains is a little less, and a good report might give us another higher day if the numbers do actually come in better than the consensus.
Of the 231 S&P companies that have been reported so far for the fourth-quarter, 71% of them have beaten the consensus and earnings are now projected to be ahead by 3.7%, better than the 1.9% projection at the start of the reporting period but well below the 10% that the experts thought would be forthcoming last October. The percentage of companies that has beaten consensus has been 65% over the past four quarters and 62% since 1994.
This earnings parade this week finishes with Friday: Dow components CVX, MRK and XOM, plus LVS, MAT and SFLY.
In addition to tomorrow’s jobs report, we will also get – final January U. of Michigan Consumer Sentiment Survey, December construction spending, January vehicle sales and January ISM Manufacturing Survey.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 3.7% gains for the fourth-quarter are projected at the present time, in addition to a gain of 3.5% for the first-quarter of 2013.
The S&P trades at 14.7 times the projected 2012 earnings of $102, according to the analysts who follow these companies. Earnings were $85 in 2010 and were $92 in 2011. The estimate for 2013 is $108, a gain of 6%. The average P/E multiple for the S&P going back to 1954 has been 16.4.
After four consecutive quarters of negative G.D.P. growth, we had 12 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010, every quarter in 2011, and every quarter this year except for the fourth-quarter, and today’s lower number broke this streak, but the number is still subject to revision. G.D.P. now has risen by 2.2% in 2012, and is projected to increase by 2% next year, according to various surveys.
Donald M. Selkin